Divyasree NSL Infrastructure Private Limited, Hyderabad V. Asst. Commissioner of Income Tax, Circle-1(2), Hyderabad

ITA 1116/Hyd/2017

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 6607 (ITAT-HYDERABAD)
• Duration Of Justice: 4 year(s) 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2021
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: DB-B
• Assessment Year: 2009-2010
• Appeal Filed On: 02-07-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ROHIT MAJUMDAR
• Section: 143(3); 14A; 115JB; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B”: HYDERABAD (THROUGH VIRTUAL CONFERENCE) B EFORE SH RI SA TBEER SING H GODA RA, JU DI CIA L MEM BER AND SHR I L AXMI PR AS A D SAHU , AC COUNT ANT MEMBE R ITA No. 1116/H/2017 Assessment Year: 2009-10 Divyasree NSL Infrastructure Pvt. Ltd., Hyderabad. PAN – AACCD 3662N Vs. Asst. Commissioner of Income-tax, . Circle – 17(1), Hyderabad. (Appellant) (Respondent) Assessee by: Shri A.V. Raghuram Revenue by: Shri Rohit Majumdar, Sr.AR Date of hearing: 30/11/2021 Date of pronouncement: 10/12/2021 O R D E R PER L.P. SAHU, A.M.: This appeal filed by the assessee is directed against CIT(A) - 5, Hyderabad’s order dated 31/03/2017 for AY 2009-10 involving proceedings u/s 143(3) of the Income Tax Act, 1961 ; in short “the Act on the following grounds of appeal: “ 1. On the facts and in the circumstances of the case, the order of Commissioner of Income Tax (Appeals)-5, Hyderabad, dismissing the appeal of the Appellant is ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 2 -: erroneous, illegal and unsustainable both on facts and in law. 2. The Commissioner (Appeals) erred in upholding disallowance of interest of Rs. 1,72,08,973, incurred on the business investment of Rs.22,61,29,005 made in Birla Sunlife Short Time Fund and IDFC Arbitrage Plus Fund. 3. The Commissioner (Appeals) erred in holding that the above business investment is not related to the objects of the Appellant. The Commissioner (Appeals) ought to have appreciated that the intention of the Appellant was to earn profit by investing in such fund, and just because the resultant income is "dividend income", it does not seize to be a business activity. 4. The Commissioner (Appeals) erred in failing to appreciate that the interest of Rs.3,95,60,433 claimed by the Appellant in its profit and loss account relates to setting up of PEB Building which generated income in the form of lease rentals. 5. The Commissioner (Appeals) ought to have appreciated that the Assessing Officer has disallowed expenditure relating to exempted income by applying provisions of section 14A of the Act read wit Rule 8D of the Rules, and hence the disallowance of interest of Rs. 1,72,08,973 is illegal and unsustainable in law. 6. On the facts and in the circumstances of the case, the Commissioner (Appeals) ought to have held that the provisions of section 115JB of the Act are not applicable to the Appellant, even if it is taken that such contention was taken for the first time before him. Th~ Commissioner (Appeals) ought not to have remitted the matter back to the file of Assessing Officer as the above issue is a legal issue and could have been decided by the Commissioner (Appeals). ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 3 -: For these and other grounds that may be urged at the time of hearing.”` 2. Briefly, the facts of the case are that the assessee company filed its return of income for AY 2009-10 on 24/09/2009 declaring Nil income and book profits at Rs. 1,29,17,459/- Subsequently, the case was selected for scrutiny and accordingly, statutory notices were issued to the assessee. The AO completed the assessment by making the following additions: 1. Interest on fixed deposits and miscellaneous income of Rs. 88,45,304/- 2. Disallowance u/s 14A of Rs. 12,30,175/- and 3) Interest on investments of Rs. 1,72,08,973/- 3. When the assessee preferred an appeal before the CIT(A), the CIT(A) partly allowed for statistical purposes. 4. Aggrieved by the order of the CIT(A), the assessee is in appeal before the ITAT and raised 6 grounds of appeal as quoted supra. 5. As regards ground Nos. 1 to 4 relating to disallowance of interest of Rs. 1,72,08,973/-, the AO observed that during the year under consideration, the assessee had invested in mutual funds amounting to Rs.17,61,29,005/- and Rs .5,00,00,000/- in Birla Sun Life short term fund and IDFC Arbitrage Plus Fund respectively. Further, the AO ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 4 -: observed that the nature of the assessee-company was development of SEZ projects for IT & ITES buildings and in fact not relatable to any investments. Hence, the AO was of the view that the said investments made by the assessee- company were not related to the nature and activities of the assessee company. He noted that the assessee company started its activities from borrowing funds on which the assessee had been paying interest also. As the assessee- company had invested in the above mentioned mutual funds from the borrowed funds on which the assessee had been paying interest, according to the AO, investments made to the extent of Rs.22,61,29,005/- were in the nature of capital. He, therefore, worked out the interest on the said investments to the extent of Rs. 1,72,08,973/- and the same was disallowed. 6. Before the CIT(A), the assessee contended as under: “The appellant contended that the dividend earned by it is deducted from capital work-in-progress. He further contended that out of interest expenditure of Rs.21,67,95,396/- during the year, only Rs.3,95,60,433/- was charged to profit and loss account and the balance was capitalized and dividend income on mutual funds was also reduced from the capital expenditure. The appellant further contended that this disallowance of interest is erroneous since proportionate disallowance has already been made under section 14A of the Act. The appellant also contended that the company is engaged in the business of creation of infrastructure facility by constructing bui1d~ngs for clients of ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 5 -: Information Technology (T)/Information Technology Enabled Services in Special Economic Zone (SEZ Project) notified under Section 3 of the Special Economic Zones Act, 2005 and the provisions of Section 115JB of the IT Act, 1961 are not applicable.” 7. After considering the submissions of the assessee, the CIT(A) confirmed the disallowance made by the AO by observing as under: Left blank intentionally ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 6 -: ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 7 -: ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 8 -: ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 9 -: ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 10 -: Considering the above reasoning, I hold that the AO is justified in disallowing the proportionate interest of Rs. 1,72,08,973/-.” ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 11 -: 8. Before the CIT(A), the assessee also challenged the book profits determined u/s 115JB of the Act, contending that the assessee is engaged in the business of creation of infrastructure facility by constructing buildings for clients of IT and ITES in SEZ units and notified u/s 3 of Special Economic Zones Act, 2005 and the assessee claimed that it had filed a revised return claiming that the provisions of section 115JB are not applicable to it. 8.1 The CIT(A) remitted this issue to the AO with a direction to examine the claim of the assessee only after verification of the revised return filed in time and other relevant materials. 9. Before us, the ld. AR of the assessee besides reiterating the submissions made before the authorities below, submitted that the assessee has charged the interest to the revenue account on the proportionate basis of Rs. 3,95,60,433/-, which relates to the PEB Building and against this building assessee was receiving rental income and rest of the interest of Rs. 17,72,34,962/- was transferred to capital work-in-progress account, which is evident form the paper book at page No. 100. He, therefore, contended that the disallowance made by the AO and confirmed by the CIT(A) is not justified because the assessee is receiving rent from the said building. ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 12 -: 9.1 Further, in respect of book profits calculated by the AO u/s 115JB, he drew our attention to paper book at pages Nos. 92 to 94 to submit that the assessee is engaged in the business of creation of infrastructure facility by constructing buildings for clients of IT/ITES in SEZ notified u/s 3 of SEZ Act, 2005. He, therefore submitted that the provisions of section 115JB will not apply to the case of the assessee. 10. The ld. DR, on the other hand, relied on the orders of revenue authorities and submitted that the assessee has utilized interest bearing funds for earning exempt income, which was not the main purpose of the assessee’s business. He, therefore, submitted that such transactions could not be regarded as carrying business and before the CIT(A) the assessee conceded that the object of making investments for earning dividend is only incidental, but, the activity carried on by the assessee involves earning of dividend income. He, therefore, submitted that the CIT(A) has rightly confirmed the addition made by the AO on this count on the ground that the assessee is not entitled for deduction of interest u/s 36(1)(iii). 10.1 With regard to determination of book profits u/s 115JB, the ld. DR submitted that the CIT(A) has rightly remitted the issue to the AO for verification. ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 13 -: 11. We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. It is observed that the assessee had made investments to the extent of Rs. 22,61,29,005/- during the year. From the order of CIT(A), we find that the assessee had challenged the addition of Rs. 1,72,08,973/- towards disallowance of interest made by the AO and re-computation made under the MAT provisions only. On going through the order of CIT(A), it has been observed that the assessee has invested in Birla Sunlife Short Term fund of Rs. 17,61,29,005/- and IDFC Arbitrage Plus fund of Rs. 5,00,00,000/- and on these investments, the AO has made proportionate disallowance of interest to the extent of Rs. 1,72,08,973/-. The entire above investments were made during the FY relevant to the AY under consideration only which is evident from Schedule 8 of the Financial Statements. . The CIT(A) has observed that the entire investments were made out of interest bearing loans taken by the assessee company. Therefore, it is clear from the order of the CIT(A) that assessee’s claim that short term investments were made out of surplus funds, is not tenable. We observe from the balance sheet of the assessee company that own funds were Rs. 10,18,25,360/-, which had already been exhausted in the previous FY and the assessee has made fresh investments during the year. During the impugned year, there is increase on loan funds by Rs. 173.60 crores (424.07 – 250.47). In the impugned ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 14 -: AY, there is increase in surplus funds only to the extent of Rs. 1,46,19,825/- (Rs. 1,64,45,185 – 18,25,360), which is less than the investments. The above observations clearly show that there is direct nexus between loans taken and investments made. The arguments of the assessee that in the bank account huge funds are lying to submit that it has own funds, are not acceptable. They are unutilized amounts which were kept idle in the bank generated through loan funds because the own funds have already been exhausted in previous years. In view of our above observations and considering the findings of the CIT(A), we find no infirmity in the order of the CIT(A) in confirming the disallowance of interest of Rs. 1,72,08,973/- u/s 36(1)(iii) made by the AO towards proportionate interest on the investments made by the assessee during the year and upholding the order of the CIT(A), we dismiss the ground Nos. 2 to 4 raised by the assessee on this issue. 12. As regards ground No. 6 that the provisions of section 115JB of the Act are not applicable to the assessee, the CIT(A) remitted this issue to the AO as per section 251(1)(a) of the Act. Since this issue has not been examined by the AO at the assessment stage, we deem it fit and proper to remit this issue to the file of the AO for verification as to whether the assessee is exempt for MAT provisions u/s 115JB of the Act and decide the issue in accordance with law after providing reasonable opportunity of being heard to the assessee. The assessee is ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 15 -: directed to substantiate its claim by way of documentary evidence at his own risk and responsibilities with three effective opportunities of hearing. Thus, this ground is treated as allowed for statistical purposes. 13. As regards ground No. 5 that the CIT(A) ought to have appreciated that the AO has disallowed expenditure relating to exempt income by applying provisions of section 14A of the Act read with rule 8D of the Rules, and hence, the disallowance of interest of Rs. 1,72,08,973/- is illegal and unsustainable in law, we find that the lower authorities have decided the issue of Rs. 1,72,08,973/- as peer section 36(1)(iii) of the I.T. Act, 1961. The assessee has taken this ground for the first time before us, which is not emanated from the order of CIT(A). Therefore, this ground cannot be entertained here and, hence, rejected. 14. In the result, appeal of the assessee is partly allowed for statistical purposes in above terms. Pronounced in the open court on 10 th December, 2021. Sd/- Sd/- (S.S. GODARA) (L. P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated: 10 th December, 2021. kv ITA No.. 1116/Hyd/2017 M / s D i v y a s r e e N S L I n f r a s t r u c t u r e P v t . L t d . , H y d . :- 16 -: Copy to : 1 M/s Divyasree NSL Infrastructure Pvt. Ltd., C/o Shri AV Raghu Ram, 610, Babukhan Estate, Basheerbagh, Hyderabad – 500 001 2 ACIT, Circle - 17(1), Signature Towers, Kondapur Road, Hyderabad – 500 084. 3 CIT(A) - 5, Hyderabad 4 Pr. CIT – 5, Hyderabad 5 ITAT, DR, Hyderabad. 6 Guard File.