Adaequare Info Private Limited, Hyderabad V. Dy. Commissioner of Income Tax , Circle-1(1), Hyderabad

ITA 119/Hyd/2018

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 1642 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 1 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-02-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB-A
• Assessment Year: 2012-2013
• Appeal Filed On: 12-01-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: PAWAN TOSHNIWAL
• Keywords: Earning of tax free income; Rule 8D
• Section: 143(3); 14A; 201; 13

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A , HYDERABAD (THROUGH VIRTUAL HEARING) BEFORE SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI SATBEER SINGH GODARA , JUDICIAL MEMBER ITA NO S . 119, 120 AND 121/HYD/2018 ASSESSMENT YEAR S : 2012 - 13, 2013 - 14 AND 2014 - 15 ADAEQUARE INFO P RIVATE LIMITED, HYDERABAD. PAN: AAECA 6276 B VS. DCIT, CIRCLE - 1(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI PAWAN TOSHNIWAL REVENUE BY: SHRI SUNIL KUMAR PANDEY, DR DATE OF HEARING: 08/02/2021 DATE OF PRONOUNCEMENT: 16 /02/2021 ORDER PER A. MOHAN ALANKAMONY, AM.: ALL THESE APPALS ARE FILED BY THE ASSESSEE AGAINST THE ORDERS OF THE LD. CIT (A) - 1, HYDERABAD IN APPEAL NO. 0097 , 0018 & 0176 /CIT(A) - 1,HYD/2015 - 16/2017 - 18, DATED 13/09/2017 PASSED U/S. 143(3) R.W.S 250(6) OF THE ACT FOR THE AYS 2012 - 13, 2013 - 14 AND 2014 - 15. 2. THE ASSESSEE HAS RAISED FIVE IDENTICAL GROUNDS IN ITS APPEALS AND THE CRUX OF THE ISSU E IS THAT THE LD. CIT (A) HAS UPHELD THE ORDER OF THE LD. AO WHO INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT R.W. RULE 8 D OF THE RULES AND DISALLOWED EXPENDITURE OF RS. 8, 13,694/ - , RS. 2 13,25,953/ - AND RS. 13,32,135/ - FOR THE AY: 2012 - 13, 2013 - 14 AND 2014 - 15 RESPECTIVELY. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF COMPUTER SOFTWARE FILED ITS RETURN OF INCOME ON 29/9/2012, 26/11/2013 AND 28/11/2014 DECLARING ITS TOTAL INCOME FOR THE AY 2012 - 13, 2013 - 14 AND 2014 - 15 RESPECTIVELY. THEREAFTER, THE CASE OF THE ASSESSEE WAS TAKEN UP FOR SCRUTINY AND THE ASSESSMENT WAS COMPLETED ON 27/3/2015, 14/3/2016 AND 25/8/2016 RESPECTIVELY . DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE LD. AO OBSERVED THAT THE ASSESSEE S HAD INVEST ED IN EQUITY SHARES OF OTHER COMPANIES WHICH ARE NOT THE ASSESSEES SUBSIDIARY COMPANIES WHICH STOOD AT RS. 6,35, 8 6,479/ - , RS. 6,40,86,479/ - AND RS. 6,40,86,47 9/ - FOR THE AYS 2012 - 13, 2013 - 14 AND 2014 - 15 RESPECTIVELY. THEREFORE, THE LD. AO INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT R.W. RULE 8D OF THE RULES AND COMPUTED THE DISALLOWANCE AT RS. 8,13,694/ - , RS. 13,25,953/ - AND RS. 13,32,135/ - FOR THE AY: 201 2 - 13, 2013 - 14 AND 2014 - 15 RESPECTIVELY. ON APPEAL, THE LD. CIT (A) CONFIRMED THE ORDER OF THE LD. AO VIDE HIS SEPARATE ORDER S DATED 13/9/2017 BY OBSERVING AS FOLLOWS: - 5.2. BEFORE ME, THE APPELLANT SUBMITTED THAT THE APPELLANT COMPANY WAS INCORPORATED ON 30/01/2003 UNDER THE INDIAN COMPANIES ACT, 1956. MR. P. PAVAN (MAIN PROMOTER), AN NRI INCORPORATED THE COMPANY WITH A VIEW TO EXPLOIT BUSINESS AVENUES AND THEREBY GENERATE E MPLOYMENT TO THE RESIDENT INDIANS. MR. P. PAVAN WAS WORKING FOR M/S. ADQEQUARE INC AT VIRGINIA IN THE UNITED STATES OF AMERICA. THOUGH THE 3 APPELLANT COMPANY TOOK OFF ON LIGHT NOTES, IT WAS ABLE TO GENERATE BUSINESS CONSIDERABLY AFTER FIVE YEARS FROM THE DATE OF ITS INCORPORATION. THE BUSINESS DEVELOPED BY LEAPS AND BOUND AND WITHIN A SHORT SPAN, THE MAIN PROMOTER MR. P. PAVAN WAS ABLE TO NEGOTIATE WITH THE OWNERS OF THE COMPANY WHICH HAD EMPLOYED HIM IN THE USA. THE REASON TO TAKE OVER THE COMPANY IN TH E USA WAS SINCE ADAEQUARE INC USED TO SUBCONTRACT ALL ITS WORK TO M/S. ADAEQUARE INFO PRIVATE LIMITED (AIPL). IN ORDER TO ACQUIRE M/S. ADAEQUARE INC. USA, MR. P. PAVAN FLOATED M/S. AIPL HOLDINGS INC AS A SPECIAL PURPOSE VEHICLE TO ENSURE TAKEOVER OF M/S. ADAEQUARE INC. USA. M/S. ADAEQUARE INFO PRIVATE LIMITED INVESTED USD 5,32,000 (RS. 2,07,58,000/ - ) TO HOLD 70% IN THE SHARES OF AIPL HOLDINGS INC IN THE FY 2007 - 08, APART FROM THE 30% EQUITY SHARES HELD BY MR. P. PAVAN. FURTHER, THE COMPANY HAD INVESTED T HIS AMOUNT OUT OF ITS ACCUMULATED PROFITS AMOUNTING TO RS. 2,36,91,192/ - . AIPL HOLDINGS INC IN - TURN ACQUIRED 100% EQUITY STAKE IN M/S. ADAEQUARE INC THEREBY MAKING ADAEQUARE INC AS THE STEP - DOWN SUBSIDIARY OF M/S. ADAEQUARE INFO PRIVATE LIMITED. THE APPE LLANT SUBMITTED THAT ALL THE EXISTING CONTRACTS WERE TAKEN UP BY THE INDIAN HOLDING COMPANY THEREBY INCREASING THE PROFIT MARGINS AND AS WELL AS EMPLOYMENT TO LOCAL TECHIES. THE APPELLANT COMPANY ALSO ACQUIRED M/S. UDYOG SOFTWARE INDIA LIMITED IN THE FY 20 09 - 10 AND FY 2010 - 11. THE APPELLANT SUBMITTED THAT TILL DATE THE APPELLANT COMPANY USED TO DEVELOP PROGRAMS AND MODULES FOR ITS CLIENTS, BY ACQUIRING M/S. UDYOG SOFTWARE. IT TOOK OVER A MAJOR SOFTWARE SUPPLIER IN THE FIELD OF INDIRECT TAXES. THE APPELLAN T COMPANY SUBMITTED THAT THEY HAVE INVESTED 90.85% EQUITY SHAREHOLDING OF THE COMPANY AMOUNTING TO RS . 4,27,39,479/. AS ON THE DATE OF ACQUISITION THE APPELLANT COMPANY HAD ACCUMULATED PROFITS OF RS. 6,19,25,730/ - . THE APPELLANT SUBMITTED THAT BY DOING SO , THE APPELLANT COMPANY GOT MAJOR BOOST AND THERE WAS STEEP RAISE IN THE SOFTWARE SALES. AS EVIDENT FROM THE FINANCIAL STATEMENTS THE PROFITS OF THE COMPANY ROSE THERE BY MAKING IT ONE OF THE KEY PLAYERS IN THE FIELDS OF THE IT / ITES. THE APPELLANT SUBM ITTED FINANCIAL STATEMENTS FOR THE FY 2012 - 13 , 2013 - 14 5.3. THE SUBMISSIONS OF THE APPELLANT HAVE BEEN CAREFULLY EXAMINED. DURING THE ASSESSMENT PROCEEDINGS, THE APPELLANT HAS AGREED FOR THE DISALLOWANCE OF EXPENDITURE MADE U/S 14A AFTER PERUSING THE AMOUNT OF INVESTMENT AND THE LEGAL PROVISIONS EXISTING WITH RESPECT TO EXEMPT INCOME. ACCORDINGLY, THE ASSESSING OFFICER MADE DISALLOWANCE U/S. 14A. ON VERIFICATION, IT IS NOTICED THAT AS PER THE BALANCE SHEET AND P & L ACCOUNT , THE APPELLANT HAS. LONG T ERM BORROWINGS RS. 53,01,361 (2012 - 13) RS. 1,38,18,744 ( AY 2013 - 14) AND RS. 1,22,52,160 ( AY 2014 - 15) 4 OTHER CURRENT LIABILITIES OF RS. 1,20,90,960 (AY 2012013), RS. 1,37,67,625 ( AY 2013 - 14) AND RS. 51,73,392 ( AY 2014 - 15) SHORT TERM LOANS AND ADVANCES TO THE TUNE OF RS. 1,48,95,660 ( AY 2012 - 13, RS. 31,53,989 (2013 - 14) AND RS. 58,73, 749 ( AY 2014 - 15) THE COMPANY HAS LONG TERM LOANS AND ADVANCES AMOUNTING TO RS. 1,02,87,433 (2012 - 13), RS. 3,09,72,516 (2013 - 14) . TRADE PAYABLES OF RS. 10,39,812 (AY 2012 - 13) RS. 21,02,966 (2013 - 14) AND RS. 24,15,687 ( AY 2014 - 15) IT IS PRUDENT ALSO NOTE THAT THE FINANCE COST AS PER THE ANNUAL ACCOUNTS FOR THE YEAR ENDING 31/3/2013 IS TO THE TUNE OF RS. 13,70,159 (AY 2012 - 13), RS. 18, 25,847 (AY 2013 - 14) AND RS. 24,90,058 (2014 - 15) SHORT TERM PROVISION OF RS. 91,77,594 (CURRENT LIABILITIES) (AY 2014 - 15) HENCE, THE SUBMISSIONS OF THE APPELLANT THAT THEY HAVE ENOUGH / SURPLUS FUNDS AT THEIR DISPOSAL, IS NOT TRUE PICTURE. FIRSTLY, THE APP ELLANT HAS RECEIVED FUNDS DURING THE YEAR WHICH WERE DIVERTED AS INVESTMENTS IN OTHER COMPANIES. HENCE, THERE IS A CLEAR - CUT NEXUS BETWEEN LOANS / ADVANCES TAKEN AND INVESTMENTS MADE. SECONDLY, THE APPELLANT HAS CONTENDED THAT NO DIVIDEND WAS RECEIVED DU RING THE RELEVANT FINANCIAL YEAR. SINCE THE INVESTMENT IS IN THE CURRENT YEAR, THE POSSIBILITY OF DIVIDEND OR ANY SUCH INCOME MAY NOT HAVE ARISEN BECAUSE OF SHORT PERIOD. HENCE, THE CONTENTION OF THE APPELLANT IS NOT ACCEPTED. THIRDLY, THE APPELLANT HAS B ORROWINGS OF LONG TERM, DEFERRED TAX LIABILITIES AND CURRENT LIABILITIES TO THE TUNE OF RS. 3,53,09,969 (AY 2012 - 13), RS. 4,60,25,270 (AY 2013 - 14) AND RS. 3,68,74,757 (AY 2014 - 15). INTEREST PAID DURING THE YEAR RS. 13,70,159 (AY 2012 - 13), RS. 18,25,847 (AY 2013 - 14) AND RS. 24,90,058 (2014 - 15) . THIS CONFIRMS THAT THE APPELLANT COMPANY HAS TAKEN BORROWINGS AND PAID INTEREST TOP RUN THE BUSINESS. BUSINESS EXPEDIENCY MANIPULATES / DIRECTS THE OUTFLOWS OF THE COMPANY. IN THE CASE WHERE THE APPELLANT IS PA YING THE INTEREST OF RS. 13,70,159 (AY 2012 - 13), RS. 18,25,847 (AY 2013 - 14) AND RS. 24,90,058 (AY 2014 - 15) , IT IS OBVIOUS THAT APPELLANT DOES NOT HAVE THAT KIND OF MONEY. HENCE, I FIND THAT THE ASSESSING OFFICER HAS CORRECTLY APPLIED U/S. 14A. AS THE CALC ULATION HAS BEEN MADE UNDER RULE 8D, THE ADDITION IS UPHELD. 4. AT THE OUTSET, THE LD. AR SUBMITTED THAT THE ASSESSEE HAD MADE THE ENTIRE INVESTMENT IN ITS SUBSIDIARY COMPANIES OUT OF ITS NON - INTEREST 5 BEARING FUNDS BECAUSE THE ASSESSEES EQUITY SHARE A ND ACCUMULATED PROFIT WERE MORE THAN THE INVESTMENT MADE IN THE SUBSIDIARY COMPANIES. THEREFORE, NEITHER ANY INTEREST COST COULD BE ATTRIBUTED FOR MAKING SUCH INVESTMENT NOR ANY OTHER COST BECAUSE THE ENTIRE INVESTMENT WAS MADE IN ITS OWN SUBSIDIARY COMPANY. IT WAS THEREFORE REQUESTED THAT THE ADDITION MADE BY THE LD. REVENUE AUTHORITIES MAY BE DELETED. THE LD. DR ON THE OTHER HAND VEHEMENTLY ARGUED IN SUPPORT OF THE ORDE RS OF THE LD. REVENUE AUTHORITIES. 5 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE MATERIALS ON RECORD. FACTUALLY FOR MAKING ANY INVESTMENT IN EQUITY SHARES BY ANY ENTITY ONLY THE FOLLOWING CATEGORIES OF EXPENDITURE WILL BE ATTRIBUTABLE: - (I) INTEREST ON INTEREST BEARING FUNDS THAT IS UTILISED FOR THE PURPOSE OF MAKING SUCH INVESTMENT. (II) DIRECT AND INDIRECT EXPENSES ATTRIBUTABLE TO THE PROCESS OF MAKING SUCH INVESTMENT SUCH AS EXPENDITURE INCURRED FOR DUE DILIGENCE, MANAGERIAL EXPENDITURE, CLER ICAL EXPENSE, STATIONARY EXPENDITURE, AND PORTFOLIO MANAGEMENT EXPENDITURE. 6 . THERE CANNOT BE ANY OTHER EXPENDITURE OTHER THAN THE EXPENDITURE MENTIONED HEREIN ABOVE THAT CAN BE INCURRED BY AN ENTITY WHICH WILL BE ATTRIBUTABLE TOWARDS INVESTMENT S MADE IN EQUITY SHARES OF OTHER 6 COMPANIES. IN THE CASE OF THE ASSESSEE, THE ASSESSEE HAS INVESTED IN ITS OWN SUBSIDIARY COMPANIES OUT OF ITS NON - INTEREST - BEARING FUNDS SUCH AS OWN SHARE CAPITAL AND RESERVES A ND THIS IS NOT IN DISPUTE. SINCE IN THE CASE OF THE ASSESSEE THE ASSESSEE COMPANY HAS UTILISED ONLY ITS NON - INTEREST - BEARING FUNDS FOR MAKING INVESTMENT IN IT S OWN SUBSIDIARY COMPANY, NO INTEREST COST CAN BE ATTRIBUTABLE TO THE SAM E BECAUSE, THERE IS NO IN TEREST COST TO THE ASSESSEE AS IT CAN BE TREATED THAT THE ASSESSEE HAS WITHDRAWN FROM ITS CAPITAL AND RESERVES WHICH ARE ASSESSES INTEREST FREE FUNDS FOR MAKING SUCH INVESTMENT . FURTHER, FOR MAKING INVESTMENT IN ITS OWN COMPANY THERE CANNOT BE ANY COST A TTRIBUTABLE WITH RESPECT TO DIRECT AND INDIRECT EXPENSES TOWARDS THE PROCESS OF DECISION MAKING, DUE DILIGENCE, MANAGERIAL EXPENDITURE , AND PORTFOLIO MANAGEMENT EXPENDITURE BECAUSE NO SUCH COST CAN ARISE FOR MAKING INVESTMENT IN ONES OWN ENTITY . FURTHER, ONLY MEAGRE EXPENSES CAN BE ATTRIBUTABLE WITH RESPECT TO CLERICAL AND STATIONARY EXPENSES WHICH IS NEGLIGIBLE AND THAT IS DESERVED TO BE IGNORED . THEREFORE, FACTUALLY THERE CANNOT BE ANY EXPENDITURE ATTRIBUTABLE TO THE INVESTMENT MADE IN SISTER COMPANY WHEN THE INVESTMENT IS OUT OF ITS OWN INTEREST FREE FUND. WHEN THE ABOVE FACTS WERE POINTED OUT TO THE LD. DR , HE COULD NOT CONTROVERT TO THE SAME HOWEVER , HE RELIED ON THE OR DER OF THE LD. AO. CONSIDERING THESE FACTS, WE ARE OF THE VIEW THAT IF THE ASSESSEE HAS MADE THE ENTIRE INVESTMENT OUT OF ITS NON - INTEREST - BEARING FUNDS IN ITS SISTER COMPANY , THEN PROVISIONS OF SECTION 14A OF THE ACT WILL NOT BE APPLICABLE . THEREFORE, IN THE INTEREST OF JUSTICE, WE HEREBY REMIT THE 7 MATTER BACK TO THE FILE OF THE LD. AO TO EXAMINE WHETHER THE ASSESSEE HAS MADE THE ENTIRE INVESTMENT IN ITS SISTER COMPANIES AND OUT OF ITS NON - INTEREST - BEARING FUND AND IF FOUND SO DELETE THE ADDITION MADE BY I NVOKING SECTION 14A OF THE ACT AND IF FOUND OTHERWISE, PASS APPROPRIATE ORDER IN ACCORDANCE WITH LAW AND MERIT AFTER AFFORDING PROPER OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. WE ALSO MAKE IT CLEAR THAT IF THE ASSESSEES EQUITY SHARE AND RESERVES EXCEED THE INVESTMENT, IT SHOULD BE CONSTRUED THAT THE ASSESSEE HAD MADE THE INVESTMENT OUT OF ITS OWN NON - INTEREST - BEARING FUND . IT IS ORDERED ACCORDINGLY. 7. IN THE RESULT, ALL THE THREE APPEALS OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES AS INDICATED HEREIN ABOVE. PRONOUNCED IN THE OPEN COURT ON THE 16 TH OF FEBRUARY 2021. SD/ - SD/ - (S.S. GODARA) ( A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED: 16 TH FEBRUARY , 2021. OKK COPY TO: - 1. ADAEQUARE INFO PRIVATE LIMITED, NORTH EAST BLOCK, 1 ST FLOOR, DISPLAY BUILDING, NAC CAMPUS, KONDAPUR, HYDERABAD. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 1(1), IT TOWERS, AC GUARDS, MASAB TANK, HYDERABAD 500 004. 3. THE COMMISSIONER OF INCOME TAX (APPEALS) - 1, HYDERABAD. 4. THE PRINCIPAL COMMISSIONER OF INCOME TAX - 1, HYDERABAD. 5. THE DEPARTMENTAL REPRESENTATIVE, ITAT, HYDERABAD. 6. GUARD FILE