The ACIT.,Cir-16(3), Hyderabad V. M/s Progressive Constructions Limited, Hyderabad

ITA 1045/HYD/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5587 (ITAT-HYDERABAD)
• Duration Of Justice: 7 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 01-07-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: V RAGHAVENDRA RAO
• Keywords: Capital asset; Business income; Depreciation; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 43B; 14A; 32; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA.NO.1045/HYD/2013 ASSESSMENT YEAR 2009-2010 ACIT, CIRCLE 16(3) HYDERABAD VS. M/S. PROGRESSIVE CONSTRUCTIONS LTD. HYDERABAD PAN AABCP 2274M (APPELLANT) (RESPONDENT) CROSS OBJECTION NO. 45/HYD/2013 ARISING OUT OF ITA.NO.1045/HYD/2013 - ASSESSMENT YEAR 2009-2010 M/S. PROGRESSIVE CONSTRUCTIONS LTD. HYDERABAD PAN AABCP 2274M VS. DCIT, CIRCLE 16(3) HYDERABAD (APPELLANT) (RESPONDENT) FOR REVENUE : MR. D.SUDHAKAR RAO CIT DR FOR ASSESSEE : MR. V. RAGHAVENDRA RAO DATE OF HEARING : 13.02.2014 DATE OF PRONOUNCEMENT : 19.02.2014 ORDER PER B. RAMAKOTAIAH, A.M. THE APPEAL IS BY REVENUE AGAINST THE ORDER OF THE CIT(A)-V, HYDERABAD DATED 28.03.2013. THE REVENUE IS CONTESTING IN ITS 11 GROUNDS THE ORDER ON ISSUES OF - (A) CLAIM OF DEPRECIATION ALLOWED ON THE ROAD CONSTRUCTED BY THE ASSESSEE (GROUND NOS. 2 TO 6) ITA.NO.1045/HYD/2013 & C.O.45/HYD/2013 M/S. PROGRESSIVE CONSTRUCTIONS LTD. HYDERABAD. (B) ALLOWANCE OF INTEREST ON MOBILIZATION ADVANCES (GROUND NO.7) (C) DISALLOWANCE UNDER SECTION 14A MODIFIED BY THE CIT(A) (GROUND NOS. 8 & 9) (D) ALLOWANCE OF TDS CREDIT (GROUND NOS. 10 & 11). 1.1. THE ASSESSEES CROSS-OBJECTION IS ON COMPUTATION U/S 14A TO THE EXTENT CIT(A) CONFIRMING THE AMOUNT. SINC E COMMON ISSUES ARE INVOLVED, THESE ARE DECIDED BY THIS COMMON ORDER. ISSUE OF DEPRECIATION CLAIMED: 2. THE ISSUE IN THE GROUNDS NO. 2 TO 6 IS WITH REF ERENCE TO THE CLAIM OF DEPRECIATION ON THE ROAD/BRIDGES CONSTRUCTED BY THE ASSESSEE. THE A.O. DISALLOWED THE DEPRECIATION C LAIMED UNDER ROAD/BRIDGE OF RS.10,59,25,968/- WHICH IS 5% OF T HE (HALF OF 10% DEPRECIATION CLAIMED) OF THE EXPENDITURE O N ROAD BRIDGE CAPITALIZED UNDER THE HEAD ROAD BRIDGE DESCRI BED AS BUILDING. AS BOT ROAD-BRIDGE OF RS.217,88,63,613/- WAS COMPLETED AND BROUGHT INTO USE FROM 28 TH DECEMBER, 2008, THE DEPRECIATION CLAIMED WAS OF 50% OF THE 10% RATE AS BUI LDING. THE A.O. AFTER MAKING ELABORATE DISCUSSION, RELYING ON CERTAIN CLAUSES OF TERMS OF AGREEMENT BETWEEN THE ASSESSEE WITH THE NATIONAL HIGHWAYS AUTHORITY OF INDIA (NHAI) HELD THAT A SSESSEE IS NOT THE OWNER OF THE BUILDING AND THE ROAD DOES NOT FOR M PART OF THE ASSETS WITHIN THE MEANING OF BUILDING. THE ASSESSEE MADE ALTERNATIVE CONTENTION THAT IF THE ROAD IS NOT TO BE TREATED AS BUILDING, THE SAME MAY BE TREATED AS PLANT AND D EPRECIATION AT 25% MAY BE ALLOWED AND IN THE ALTERNATIVE, THE ENTI RE EXPENDITURE SPENT ON CONSTRUCTION OF ROAD SHOULD BE ALL OWED AS REVENUE EXPENDITURE. THE A.O. DID NOT AGREE WITH A NY OF THE ITA.NO.1045/HYD/2013 & C.O.45/HYD/2013 M/S. PROGRESSIVE CONSTRUCTIONS LTD. HYDERABAD. ABOVE CONTENTIONS AND DISALLOWED THE DEPRECIATION CLAI MED BY THE ASSESSEE. 2.1. BEFORE THE LEARNED CIT(A) IT WAS POINTED OUT THAT THE REASONING FOR DISALLOWANCE OF THE DEPRECIATION IS A VERBATIM REPRODUCTION OF THE REASONING IN THE CASE OF NYSE INFRASTRUCTURE PVT. LTD. FOR A.Y. 2005-2006 AND IN THA T CASE, THE HONBLE ITAT AFTER CONSIDERING THE AGREEMENTS ENTE RED WITH THE NHAI ALLOWED DEPRECIATION AND RELIED ON THE ORDER OF THE COORDINATE BENCH IN THE SAID CASE. LEARNED CIT(A) AFT ER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE DECIDED IN FAVOUR OF THE ASSESSEE BY STATING AS UNDER : 5.5. I HAVE GONE THROUGH THE ASSESSMENT ORDER AND THE CASE LAW ON WHICH THE ASSESSEE RELIED. HAVING REGAR D TO THE DECISIONS OF THE HYDERABAD BENCHES OF THE ITAT IN THE CASES OF NYSE INFRASTRUCTURE PRIVATE LIMITED (SUPRA) AND N AVAYUGA ENGINEERING COMPANY LIMITED (SUPRA) AND ALSO THE DECIS ION OF THE DELHI HIGH COURT IN THE CASE OF NOIDA TOLL BRID GE (255 CTR 88) UPHOLDING THE DECISION OF THE DELHI BENCH IN IT A NOS. 3211/DEL/2006 AND 1983/DEL/2006 DT.19.12.2008, WHICH WAS FOLLOWED BY THE HYDERABAD BENCH IN THE CASE OF N YSE INFRASTRUCTURE LIMITED, I HAVE TO CONCLUDE THAT THE ASSESSEE IS ENTITLED TO THE DEPRECIATION CLAIMED ON BUILDING BOT B RIDGE. ACCORDINGLY, I DIRECT THE A.O. TO DELETE THE ADDITION MADE. 2.2. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE DO NO T SEE ANY REASON TO DIFFER FROM THE FINDING OF THE LEARN ED CIT(A). FURTHER, THIS ISSUE IS ALREADY CRYSTALISED IN FAVOUR OF T HE ASSESSEE BY VARIOUS BENCHES OF THE ITAT INCLUDING HYDE RABAD BENCHES AND AS RIGHTLY POINTED OUT, THE HONBLE DELHI HIGH COURT IN THE CASE OF NOIDA TOLL BRIDGE 255 CTR 88 HAS CONSIDERED THE ISSUE AND HELD AS UNDER : 22. THE DEPRECIATION REPRESENTS THE DIMINU TION IN VALUE OF A CAPITAL ASSET WHEN APPLIED TO THE PARTIES OF MAKING PROFIT OR GAIN. THE OBJECT IS TO GET THE TRUE PICTURE OF THE REAL INCOME OF THE BUSINESS. THE ITA.NO.1045/HYD/2013 & C.O.45/HYD/2013 M/S. PROGRESSIVE CONSTRUCTIONS LTD. HYDERABAD. RESPONDENT-ASSESSEE IS ENGAGED IN THE BUSINESS OF CONSTRUCTING ROADS AND BRIDGES. UNDER THE CONCE SSION- AGREEMENT THE LAND IS PROVIDED ON LEASE INITIA LLY FOR A PERIOD OF 30 YEARS WHICH CAN BE EXTENDED. THE RESPONDENT-ASSESSEE COMPANY IS A SPECIAL PURPOS E VEHICLE, ENGAGED IN THE BUSINESS OF BUILDING, INFRASTRUCTURE/ROADS TO GENERATE REVENUES BY COLLE CTING TOLLS TO MEET THE COST OF CONSTRUCTIONS AND E ARN PROFITS. THE CONSTRUCTION OF ROAD ON THE LEASED LAND I S THE CAPITAL ASSET OF THE COMPANY, WHICH REMAINS UN DER ITS OWNERSHIP FOR THE CONCESSION PERIOD. THE RESPON DENT- ASSESSEE EXERCISES ITS FULLY OWNERSHIP RIGHTS ON THE ROAD WHICH INCLUDE CHARGING OF TOLLS WHICH IS ORDINARI LY A SOVEREIGN FUNCTION. THE OPERATION, MAINTENANCE AND USE OF THE ROAD DURING THE CONCESSION PERIOD IS WITH THE RESPONDENT-ASSESSEE. IT HAS BEEN GIVEN EXCLUSIVE RI GHTS TO REGULATE THE USE OF THE NOIDA-BRIDGE. THE ROA D IS NOT SIMPLY A ROAD LAID OUT ON THE LAND. IT INCLU DES ALL ALLIED CONSTRUCTIONS, WHICH INCLUDES THE BRIDGE SITE. THE CONTROL OF THE LAND IDENTIFIED AS CONSTITUTING THE BRIDGE SITE IS IN COMPLETE LAND UNINTERRUPTED POSSESSI ON AND USE OF THE RESPONDENT COMPANY. IT HAS POWERS TO DE TERMINE, DEMAND, COLLECT, RETAIN AND APPROPRIATE FEES FROM THE USERS OF THE BRIDGE AND ALSO HAS THE POWER TO RESTR ICT THE USE OF THE BRIDGE TO MOTORIZED VEHICLES, BICYCLE AND PEDESTRIANS, AND TO DEBAR ANIMAL DRIVEN VEHIC LES, CYCLE RICKSHAW AND CATTLE. 23. IN MYSORE MINERALS LTD. (SUPRA) AFTER CONSIDER ING ALL THE PREVIOUS CASES DECIDED BY IT, THE S UPREME COURT CONSIDERED THE TERM 'OWNED' AS OCCURRING IN SE CTION 32 (1) OF THE ACT AND HELD THAT IT MUST BE ASS IGNED A WIDER MEANING. THE SUPREME COURT HELD THAT ANYO NE IN POSSESSION OF PROPERTY IN HIS OWN TITLE EXERCISING S UCH DOMINION OVER THE PROPERTY AS WOULD ENABLE OTHERS BEING EXCLUDED THERE FROM AND HAVING THE RIGHT TO USE AND OCCUPY THE PROPERTY AND/OR TO ENJOY ITS USUFR UCT IN HIS OWN RIGHT WOULD BE THE OWNER OF THE BUILDINGS , THOUGH A FORMAL DEED OF TITLE MAY NOT HAVE BEEN EX ECUTED AND REGISTERED AS CONTEMPLATED BY THE TRANSFER OF PROPERTY ITA.NO.1045/HYD/2013 & C.O.45/HYD/2013 M/S. PROGRESSIVE CONSTRUCTIONS LTD. HYDERABAD. ACT, THE REGISTRATION ACT ETC. THE PERSON, WHO HAVING ACQUIRED POSSESSION OVER THE BUILDING IN HIS OWN RIGHT, USES THE SAME FOR THE PURPOSES OF THE BUSINESS OR PROFESSION THOUGH A LEGAL TITLE HAS NOT BEEN CONVEYED TO HIM, BUT NEVERTHELESS IS ENTITLED TO HOLD THE PROPERTY TO THE EXCLUSION OF ALL OTHERS. 24. THE SUPREME COURT FURTHER HELD THAT DEPRECIATI ON GENERALLY SPEAKING IS AN ALLOWANCE FOR THE DIMI NUTION IN THE VALUE DUE TO WEAR AND TEAR OF THE CA PITAL ASSET EMPLOYED BY THE ASSESSEE IN HIS BUSINESS. AS FOR BUILDING, DEPRECIATION IS THE MEASUREMENT OF WEA RING OUT THROUGH CONSUMPTION OR USE BY EFFLUXION OF TIME. THE DEPRECIATION CHARGE IS MERELY THE PERIODIC OPER ATING ASPECT OF FIXED ASSET COSTS. 25. WITH THE INSERTION OF THE EXPLANATION-I TO SECTION 32 W.E.F. 1.4.1998 THERE IS NO DOUBT THAT WHERE THE ASSESSEE IS THE LESSEE OF THE BUILDING IN WHICH HE CARRIES ON BUSINESS WHICH IS NOT OWNED BY HIM BUT I N RESPECT FOR WHICH THE ASSESSEE HOLDS A LEASE OR OTHE R RIGHT OF OCCUPANCY AND ANY CAPITAL EXPENDITURE IS I NCURRED BY THE ASSESSEE OF ANY STRUCTURE OR DOING OF ANY WORK IN OR IN RELATION TO BY WAY OF RENOVATION, EXTENSIO N OR FOR IMPROVEMENT TO THE BUILDING, THEN THE PROVISIONS OF THE INCOME TAX ACT:, WILL APPLY AS IF THE SAID STRUCTUR E OR WORK IS A BUILDING OWNED BY THE ASSESSEE. EXPLANATI ON-I MAY APPLY TO RENOVATION OR EXTENSION OR IMPROV EMENT TO THE BUILDING; THE OBJECT IS TO EXTEND THE APP LICATION OF DEPRECIATION, IF SUCH BUILDINGS WHICH ARE NOT OWNED BY THE ASSESSEE BUT IN WHICH THE ASSESSEE HOLDS A LEASE OR OTHER RIGHT OF OCCUPANCY. THE PRESENT CASE STAN DS ON A BETTER FOOTING, IN WHICH THE LAND IS HELD ON LEASE AND THE ROAD AS CAPITAL ASSET HAS BEEN BUILT ON IT WITH EXCLUSIVE OWNERSHIP OF THE ROAD, AND THE BRID GE IN THE ASSESSEE-COMPANY FOR THE CONCESSION PERIOD, AND WHI CH ALSO INCLUDES THE RIGHT TO COLLECT TOLLS AND TO R EGULATE USE OF THE BRIDGE. SECTION 32 WOULD, THEREFORE, APPLY FOR THE PURPOSE OF PROVIDING DEPRECIATION TO BE WORKED OUT IN ACCORDANCE WITH THE LAW. FOR REMOVAL OF DOUBT S THE LEGISLATURE HAS PROVIDED THAT THE BUILDING INCLUD ES ITA.NO.1045/HYD/2013 & C.O.45/HYD/2013 M/S. PROGRESSIVE CONSTRUCTIONS LTD. HYDERABAD. ROADS IN NOTE (1) TO APPENDIX-I PROVIDING FOR THE TABLE OF RATES AT WHICH THE DEPRECIATION IS ADMISSIBLE. 2.3. RESPECTFULLY FOLLOWING THE SAME, WE CONFIRM THE O RDER OF THE CIT(A) AND DISMISS THE REVENUE GROUND NOS. 2 TO 6. ISSUE PERTAIN TO DISALLOWANCE OF INTEREST PAYMENTS CLAIMED ON MOBILISATION ADVANCES: 3. THE ASSESSEE CLAIMED INTEREST ON MOBILIZATION ADVANCES RECEIVED BY IT IN THE P & L ACCOUNT. THE A.O . ANALYSED THAT ASSESSEE HAS ACTUALLY INCURRED/PAID TH E AMOUNT OF RS.56,12,492/- WHEREAS INTEREST OF RS.5,66,78,872/- WAS ONLY A PROVISION MADE TOWARDS INTEREST PAYABLE ON MOBILIZAT ION ADVANCES. ASSESSING OFFICER WAS OF THE OPINION THAT P ROVISION IS NOT ALLOWABLE AS A DEDUCTION UNDER THE PROVISIONS OF T HE I.T. ACT. THEREFORE, THE ENTIRE PROVISION MADE BY THE ASSESSE E WAS DISALLOWED. LEARNED CIT(A) AFTER CONSIDERING THE SUBMISSI ONS OF THE ASSESSEE ALLOWED THE AMOUNT BY STATING AS UNDER : 7. THE NEXT GROUND RELATES TO DISALLOWANCE OF INTERES T ON MOBILIZATION OF ADVANCES AMOUNTING TO RS.5,66,78,8 72/. THE ASSESSEE INCURRED INTEREST ON ACCOUNT OF MOBILIZ ATION ADVANCES. SOME OF THE MOBILIZATION ADVANCES HAVE BE EN RECOVERED IN THIS YEAR ALONG WITH INTEREST. THE A.O. HAS ALLOWED SUCH INTEREST OF RS.56,12,492/-. HOWEVER, T HE BALANCE OF INTEREST OF RS.5,66,78,872/- WHICH IS PE RTAINING TO MOBILIZATION ADVANCES NOT RECOVERED HAS NOT BEEN ALLOWED. THE ASSESSEE MADE A PROVISION FOR THE INTE REST ON MOBILIZATION ADVANCES RECEIVED BECAUSE THE LIABILITY OF INTEREST ACCRUED IN THE PREVIOUS YEAR. ON MERCANTILE BASIS, THIS AMOUNT HAS TO BE ALLOWED. THE A.O. HAS DISALLOWED THE AMOUNT OF EXPENDITURE OF INTEREST ON MOBILIZATION A DVANCES PROVIDED IN THE ACCOUNTS ON THE BASIS THAT NO PROVI SION CAN BE ALLOWED. THE A.O. APPEARS TO BE UNDER A MISTAKEN NOTION THAT ALL PROVISIONS ARE REQUIRED TO BE DISALL OWED IN COMPUTING THE BUSINESS INCOME. IN MERCANTILE SYSTEM OF ACCOUNTING WHICH IS A SYSTEM OF ACCOUNTING SPECIFIED U/S. 145 OF THE I.T. ACT, THE LIABILITIES AND INCOME THAT ACCRUE ITA.NO.1045/HYD/2013 & C.O.45/HYD/2013 M/S. PROGRESSIVE CONSTRUCTIONS LTD. HYDERABAD. HAVE TO BE TAKEN INTO ACCOUNT FOR ARRIVING AT THE PR OFITS. THE ACCRUED INCOMES EVEN IF NOT RECEIVED HAS TO BE TAKE N INTO ACCOUNT. LIABILITIES THAT HAVE FALLEN DUE HAS AT THE END OF THE ACCOUNTING YEAR HAVE TO BE PROVIDED FOR. WHERE T HE ACT SPECIFICALLY PROVIDES SUCH AS IN SEC. 43B OR SEC.40 (2), THE EXPENDITURE INCURRED CANNOT BE ALLOWED UNDER THE IN COME TAX ACT THOUGH THEY ARE TO BE PROVIDED FOR PURPOSES OF ASCERTAINING COMMERCIAL PROFITS. THEREFORE, I DIRECT THE A.O. TO DELETE THE ADDITION OF RS.5,66,78,872/-. 3.1. AFTER CONSIDERING RIVAL CONTENTIONS, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT(A). IN FACT, THE A.O. WAS NOT CORRECT IN DISALLOWING THE ENTIRE PROVISION BY MAKING A SWEEPING STATEMENT THAT PROVISION IS NOT AN ALLOWABLE DEDUCTION UNDER THE INCOME TAX ACT. WE ARE UNABL E TO UNDERSTAND ON WHAT BASIS THE ABOVE STATEMENT WAS MA DE BY THE A.O. WHAT HE HAS TO EXAMINE IS WHETHER THE INTE REST LIABILITY HAS CRYSTALLIZED IN THE YEAR OR NOT. ONCE LI ABILITY HAS CRYSTALLIZED, WHETHER IT IS PAID OR NOT, THE AMOUNT IS AN ALLOWABLE DEDUCTION, UNLESS AS RIGHTLY POINTED OUT BY THE CIT(A) PROVISIONS SUCH AS 43B OR 40(2) AND SUCH LIKE S TATUTORY DISALLOWANCES ARE APPLICABLE. WITHOUT EXAMINING THESE, THE A.O. SIMPLY DISALLOWED ENTIRE PROVISION MADE BY THE ASS ESSEE. DISALLOWANCE MADE BY THE A.O. CANNOT BE SUSTAINED AN D CIT(A) WAS CORRECT IN ALLOWING THE AMOUNT. HOWEVER, A.O. IN PARA 7.4 IN PAGE 8 MADE AN OBSERVATION THAT ASSESSEES A.R. COU LD NOT FURNISH ANY FURTHER DETAILS AS TO METHOD OF QUANTIFICAT ION OF INTEREST PAYABLE ON MOBILIZATION ADVANCES AND COULD NOT FURNISH ANY EVIDENCE FOR SUCH QUANTIFICATION. THIS ASPE CT WAS NOT EXAMINED BY THE LEARNED CIT(A), NOR ANY WORKING WAS PLACED ON RECORD. THEREFORE, QUANTIFICATION OF THE INTERES T PROVIDED IN THE BOOKS REQUIRE EXAMINATION. THEREFORE, TO TH E LIMITED EXTENT OF EXAMINING THE PROVISION MADE VIS-- VIS MOBILIZATION ADVANCES, THE ISSUE IS RESTORED TO THE FILE OF THE ITA.NO.1045/HYD/2013 & C.O.45/HYD/2013 M/S. PROGRESSIVE CONSTRUCTIONS LTD. HYDERABAD. A.O. ACCORDINGLY, GROUND NO.7 IS CONSIDERED AS PARTLY AL LOWED TO THE EXTENT OF VERIFICATION OF THE AMOUNT QUANTIFIE D BY THE ASSESSEE. HOWEVER, THE GROUND RAISED BY THE REVENUE THAT THE AMOUNT IS NOT DEBITED TO THE P & L ACCOUNT IS NOT CORRECT AS THE ASSESSEE DID DEBIT THE AMOUNT TO THE P & L ACCOUNT AND THEREFORE, PART OF THE GROUND RAISED BY THE REVENUE IS IRRELEVANT. WITH THESE OBSERVATIONS, THE GROUND IS CONSID ERED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. DISALLOWANCE UNDER SECTION 14A MODIFIED BY THE CIT(A) (GROUND NOS. 8 & 9): 4. DURING THE YEAR ASSESSEE DID NOT HAVE ANY EXEMPT INCOME BUT ON FINDING THAT ASSESSEE MADE SEVERAL INV ESTMENTS IN COMPANIES BY ACQUIRING SHARES OR AS JOINT VENTURE COMPANIES, THE A.O. INVOKED PROVISIONS OF SECTION 14A A ND DISALLOWED INTEREST OF RS.3,37,60,799/-, BY APPLYING P ROVISIONS OF SECTION 14A AND RULE 8D FOR ITS COMPUTATION. WHILE DISALLOWING, ASSESSING OFFICERS CONTENTION WAS THAT ASSES SEE HAS TAKEN LOANS FROM BANKS AND THESE AMOUNTS WERE IN VESTED IN JOINT VENTURE COMPANIES. ACCORDINGLY, PROVISIONS OF S ECTION 14A ARE ATTRACTED EVEN THOUGH NO INCOME WAS RECEIVED DURI NG THE YEAR FROM INVESTMENTS MADE. ON CONSIDERING THE ASSE SSEES SUBMISSIONS AND ITS RELIANCE ON JUDGMENTS OF HONBLE B OMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING C O. LTD. VS. DCIT 328 ITR 81 AND HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES LIMITED 323 IT R 518, THE LEARNED CIT(A) PARTIALLY UPHELD THE ASSESSEES C ONTENTIONS. HOWEVER, ON NOTICING THAT AN AMOUNT OF RS. 13.32 CRORES WA S DIVERTED FOR INVESTMENTS IN SHARES, AS HELD IN A.YS. 20 06-07, 2007-08 AND 2008-09, THE LEARNED CIT(A) CONFIRMED THE ITA.NO.1045/HYD/2013 & C.O.45/HYD/2013 M/S. PROGRESSIVE CONSTRUCTIONS LTD. HYDERABAD. DISALLOWANCE TO THE EXTENT OF INTEREST ON THE ABOVE AMOU NT. HIS ORDER ON WORKING OUT THE DISALLOWANCE IS AS UNDER : 6.9. IN THE EARLIER YEARS I.E. 2006-07, 2007-08 AND 2008-09 , THE AO HAS ESTIMATED THE INTEREST TO BE DISALLOWED WITH REFERENCE TO THE INVESTMENT OF 13.3 2 CRORES BY CALCULATING THE DISALLOWABLE INTEREST PROPORTIONATELY. HOWEVER RULE 8D HAS BEEN INSERTED WITH EFFECT FROM 24.03.2008 . THE A.O. HAS RIGHTLY APPLIED RULE 8D FOR THE PURPOSES OF ARRIVING AT THE DISALLOWABLE INTEREST. HOWEVER, HE HAS NOT TAKEN TH E AMOUNTS PERTAINING TO THE FORMULA. THE AO HAS TAKEN THE GROSS INTEREST WHEREAS AS SUBMITTED BY THE LEAR NED COUNSEL, ONLY THE NET INTEREST I.E. AFTER REDUCING THE INTEREST INCOME HAS TO BE TAKEN AS IN THE PLACE OF A IN THE FORMULA. THE LEARNED COUNSEL HAS PARTICULARLY SUBMITTED THAT THE INTEREST INCOME HAS CLOSE NEXUS TO THE INTEREST EXPENDITURE. THIS IS BECAUSE THE INTER EST INCOME IS FROM THE DEPOSITS KEPT AS MARGIN MONEY AN D THE SOURCE OF MARGIN MONEY DEPOSITS WAS NOTHING BUT THE LOANS OBTAINED FROM THE BANKS. THEREFORE, THE F IGURE TO BE TAKEN FOR CALCULATION OF PROPORTION IS THE NE T INTEREST AND NOT THE GROSS INTEREST. FURTHER, THE B ANK CHARGES AND BANK GUARANTEE HAVE TO BE COMMISSION REDUCED FROM THE INTEREST. THE HIRE PURCHASE FINANC E CHARGES IS A DIRECT EXPENDITURE IN RELATION TO THE HIRE PURCHASE MACHINERY AND THEREFORE THEY ARE DIRECT EXPENSE PERTAINING TO THE MACHINERY. THIS AMOUNT AL SO IS REQUIRED TO BE EXCLUDED FROM THE INTEREST FIGURE . AS SUBMITTED BY THE LEARNED COUNSEL, THE INTEREST ON MACHINERY AND MOBILIZATION ADVANCES RECEIVED AND ON LOAN TIED TO BOT OF RS.26,81,43,449/- HAVE TO BE EXCLUDED. THE FIGURE FOR A IN THE FORMULA WOULD BE RS.16,76,42,761/-. IN THE PLACE OF RS.90,32,93,210/ - FIGURE OF RS.16,76,42,761/-. COMING TO B IN THE FOR MULA I.E. THE AVERAGE VALUE OF THE INVESTMENTS, THE AMOU NT OF 13.32 CRORES AS AT. THE BEGINNING AND AS AT THE END OF THE YEAR ONLY SHOULD BE ADOPTED. THEREFORE THE INVESTMENT HAS TO BE TAKEN AT 13.32 CRORES BECAUSE THE REST OF THE INVESTMENTS WERE ACCEPTED TO HAVE BEEN OUT OF ACCUMULATED PROFITS AS FAR BACK AS IN 2006-07. T HERE HAVE ALSO BEEN FURTHER CASH PROFITS IN THE SUBSEQUE NT YEARS. THEREFORE FOR THE FIGURE B IN THE FORMULA TH E AMOUNT TO BE TAKEN IS 13.32 CRORES. REGARDING THE INTEREST EXPENDITURE FIGURE, I AM ACCEPTING THE CON TENTION ITA.NO.1045/HYD/2013 & C.O.45/HYD/2013 M/S. PROGRESSIVE CONSTRUCTIONS LTD. HYDERABAD. OF THE ASSESSEE. HOWEVER, I AM NOT ACCEPTING THE CONTENTION OF THE ASSESSEE WITH REGARD TO INVESTMEN TS. THEREFORE, THE AO IS DIRECTED TO ADOPT THE INTEREST EXPENDITURE OF RS.16,76,42,761/- AS WORKED OUT BY THE ASSESSEE FOR THE ITEM A IN THE ANNEXURE TO ASSESSME NT ORDER AND THE INVESTMENT FIGURE AS WORKED OUT BY AO FOR THE ITEM B IN THE FORMULA AND WORK OUT THE DISALLOW ABLE AMOUNT UNDER SEC 14A ON THAT BASIS. 5. ON CONSIDERING THE REVENUES GROUNDS AND ASSESSEES CROSS OBJECTIONS, WE ARE CONVINCED THAT THE ORDER OF THE CIT(A) IS REASONABLE AND ACCORDING TO THE FACTS ON RE CORD. AS SEEN FROM THE ASSESSMENT ORDER, THE A.O. DID NOT EXA MINE THE ISSUE UNDER SECTION 14A AT ALL. MAY BE HE WANTED T O INVOKE THE PROVISIONS OF SECTION 36(1)(III) I.E., DIVERSION O F FUNDS BORROWED FOR THE PURPOSE OF BUSINESS FOR NON-BUSINESS ACTIVITIES. THE LEARNED CIT(A) CONFIRMATION OF DISALLOWANCE OF INTEREST ON DIVERSION OF RS.13.32 CRORES WAS ALSO ON SIMILA R LINES, EVEN THOUGH STATED TO HAVE BEEN DONE UNDER SECT ION 14A. WE ARE OF THE OPINION THAT DISALLOWANCE OF THE INTE REST PERTAINING TO RS.13.32 CRORES STATED TO HAVE BEEN INV ESTED OUT OF BORROWED FUNDS, AS ACCEPTED IN EARLIER YEARS, SHOULD HAVE BEEN CONSIDERED UNDER SECTION 36(1)(III), WHICH IS TH E RELEVANT SECTION APPLICABLE TO THE ABOVE AMOUNT. BE THAT AS IT MAY, EVEN THOUGH THE DISALLOWANCE WAS WRONGLY CONSIDERED UNDER S ECTION 14A, WE ARE OF THE OPINION THAT THE FACTS ON RECORD INDICATE THAT ASSESSEE HAS ACCEPTED DIVERSION OF BORROWED FUNDS TO THE EXTENT OF THE ABOVE AMOUNT IN EARLIER YEARS. THEREFORE, INTEREST ON THAT AMOUNT HAS TO BE DISALLOWED, IF NOT UNDER SECTIO N 14A BUT UNDER SECTION 36(1)(III). THEREFORE, WE DO NOT SEE ANY REASON IN UPHOLDING THE GROUNDS RAISED BY THE REVENUE AS WELL AS ASSESSEE. ACCORDINGLY, THE RESPECTIVE GROUNDS ARE REJ ECTED. ITA.NO.1045/HYD/2013 & C.O.45/HYD/2013 M/S. PROGRESSIVE CONSTRUCTIONS LTD. HYDERABAD. ALLOWANCE OF TDS CREDIT (GROUNDS 10 & 11): 6. BRIEF FACTS OF THE ISSUE ARE THAT THE AO DISALLOWED CREDIT FOR TDS OF RS.1,22,50,395/- DEDUCTED FROM THE MOBILIZATION ADVANCES. HE HAS ALLOWED CREDIT F OR RS.2,65,771/- WHICH PERTAINED TO THE RECOVERY. THE AO REFERRED TO RULE 37BA IN REGARD TO THE CREDIT FOR TAX DEDUCTED AT SOURCE FOR THE PURPOSE OF SEC 199. HE STATED THAT THE CREDIT FOR TAX DEDUCTED CAN ACCORDINGLY BE G IVEN TO THE ASSESSEE ONLY IF THE INFORMATION RELATING TO DEDUCT ION OF TAX FURNISHED BY THE DEDUCTOR TO THE INCOME TAX AUTH ORITY. ACCORDINGLY, THE A.O. RESTRICTED THE CREDIT FOR TAX W ITH REFERENCE TO THE STATEMENT OF 26AS ONLY ON THE GROUND THAT FROM 1-4-2008 ONWARDS THE CREDIT CAN BE GIVEN ONLY ON THE BASIS OF FORM 26AS. 6.1. AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE THE CIT(A). BEFORE THE LEARNED CIT(A), IT WAS THE CONTEN TION OF THE LEARNED COUNSEL THAT THE PROVISIONS OF SEC. 199 OF THE IT ACT HAVE SIMPLY BEEN SHIFTED TO RULE 37BA AND NO MOR E. THE FEEDING OF THE TAX DEDUCTED AT SOURCE INTO FORM 2 6AS BY THE TAX DEDUCTOR CANNOT EFFECT THE ENTITLEMENT OF THE CREDIT FOR TAX DEDUCTED AT SOURCE, WHEN THE ASSESSEE F ILES FORM 16A ISSUED BY THE DEDUCTOR. THE LEARNED COUNSEL ARGUED THAT IT IS NOT THE CASE OF THE AO THAT THE DEDU CTOR I.E. A CONTRACTEE DID NOT GRANT THE TAX CREDIT CERTIFICATE S AND THAT IF THE CERTIFICATES ARE ISSUED, THE RECONCILIATIO N BETWEEN THE FORM 26AS AND THE TAX DEDUCTION CERTIFICATES CAN NOT PREVENT OR DEPRIVE THE ASSESSEE OF THE CREDIT TO WHIC H THE ASSESSEE IS RIGHTLY ELIGIBLE. IN THE ASSESSEE'S OWN CASE, THE INCOME TAX APPELLATE TRIBUNAL HAD ALLOWED THE GRANT OF ITA.NO.1045/HYD/2013 & C.O.45/HYD/2013 M/S. PROGRESSIVE CONSTRUCTIONS LTD. HYDERABAD. CREDIT FOR THE TAX DEDUCTED AT SOURCE FROM THE MOBILIZ ATION ADVANCES IN ITS COMMON ORDER IN ITA NOS. 482 & 557/H/01 HYDERABAD 'B' BENCH FOR THE ASSESSMENT YEARS 1997-98 AND 1998-99 DATED 23-11-2006. THE LEARNED COUNSEL ALS O RELIED ON THE DECISION OF THE THIRD MEMBER IN THE CASE OF ACIT VS CHANDRAGIRI CONSTRUCTION CO. (136 ITD 133) (COCHIN) WHEREIN IT WAS HELD THAT THE TRIBUNAL MUST FOLLO W THE DECISION OF ANOTHER BENCH WHERE THE FACTS ARE THE SA ME. IN THE ASSESSEE'S OWN CASE, THE CREDIT WAS GRANTED FOR TH E TAX DEDUCTED AT SOURCE FROM THE MOBILIZATION ADVANCES. THEREFORE, THE LEARNED CIT(A) DIRECTED THE ASSESSING OFFICER THAT CREDIT FOR TAX DEDUCTED AT SOURCE FOR THE MOBILIZA TION ADVANCES SHOULD BE GRANTED, FOLLOWING THE DECISION OF THE ITAT HYDERABAD 'B' BENCH IN ASSESSEE'S OWN CASE IN IT A NOS. 482 & 557/H/01 BEFORE HYDERABAD 'B' BENCH FOR THE ASSESSMENT YEARS 1997-98 AND 1998-99 DATED 23-11-20 06 IN A COMMON ORDER. 7. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE DO NOT SEE ANY MERIT IN THE REVENUE GROUND. OBVIOUSLY ON THE S YSTEM OF ACCOUNTING BEING FOLLOWED BY THE ASSESSEE, IN EARLIE R YEARS TDS CREDIT WAS GIVEN ON THE MOBILIZATION ADVANCES. THE DEPARTMENT CANNOT DENY THE CREDIT WHEN THE ASSESSEE I S FOLLOWING THE SYSTEM CONSISTENTLY FROM EARLIER YEARS. WHAT IS REQUIRED TO BE DONE IS ONLY RECONCILATION OF THE MOBILIZ ATION ADVANCES AND TDS CLAIMS, SO THAT THERE IS NO DOUBLE C LAIM IN ANY OF THE YEARS. SINCE THE LEARNED CIT(A) FOLLOWED THE DIRECTIONS OF THE ITAT ON THE ISSUE IN EARLIER YEARS, WE A FFIRM THE SAME AND REJECT THE REVENUES CONTENTIONS. ITA.NO.1045/HYD/2013 & C.O.45/HYD/2013 M/S. PROGRESSIVE CONSTRUCTIONS LTD. HYDERABAD. 8. IN THE RESULT, BOTH THE REVENUES APPEAL AND ASSESSEES CROSS OBJECTION ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH FEBRUARY, 2014. SD/- SD/- (ASHA VIJAYARAGHAVAN) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACOUNTANT MEMBER HYDERABAD, DATED 19 TH FEBRUARY, 2014 VBP/- COPY TO : 1. THE ACIT, CIRCLE 16(3), HYDERABAD. 2. M/S. PROGRESSIVE CONSTRUCTIONS LTD. 7 TH FLOOR, RAGHAVA NORTH BLOCK, RAGHAVA RATNA TOWERS, CHIRAG ALI LANE, HYDERABAD 3. CIT(A)-V, HYDERABAD 4. C IT - IV , HYDERABAD 5. D.R. ITAT, B BENCH, HYDERABAD.