M/s Udupi Power Corporation Limited , Bangalore V. The Deputy Commissioner of Income Tax Circle-7(1)(1), Bangalore

ITA 1202/BANG/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 1885 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-06-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 26-05-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: VIJAY RANJAN
• Keywords: Depreciation; Opportunity of being heard; Principle of natural justice; Rule 8D; Set aside
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V VASUDEVAN, VICE PRESIDNET AND SHRI B.R BASKARAN, ACCOUNTANT MEMBER ITA NO.1811/BANG/2016 ITA NO.1202/BANG/2017 ASSESSMENT YEARS : 2011-12 & 2012-13 M/S UDUPI POWER CORPORATION LTD., NO.34, FIRST FLOOR, LOTUS TOWER, DEVARAJA URS ROAD, RACE COURSE, BANGALORE-560 001. PAN AAACN 7967 L VS. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-7(1)(1) (ERSTWHILE CIRCLE 12(5) , BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI VIJAY RANJAN, ADVOCATE RESPONDENT BY : SHRI PRADEEP KUMAR, CIT DATE OF HEARING : 03.04.2019 DATE OF PRONOUNCEMENT : 26.06.2019 O R D E R PER B.R BASKARAN, ACCOUNTANT MEMBER BOTH THE APPEALS FILED BY THE ASSESSEE ARE DIRECTE D AGAINST THE ORDERS PASSED BY LD CIT(A)-7, BENGALURU AND THE Y RELATE TO ASST. YEAR 2011-12 AND 2012-13. SINCE SOME OF THE ISSUES URGED IN THESE APPEALS ARE IDENTICAL IN NATURE, THEY WERE HEARD TO GETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER, FOR THE SAK E OF CONVENIENCE. ITA NOS.1811/BANG/2016 & 1202/BANG/2017 PAGE 2 OF 10 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF GENER ATION OF SALE OF POWER. 3. THE FIRST COMMON ISSUE URGED IN BOTH THE YEARS R ELATES TO DISALLOWANCE OF CLAIM OF MARKED TO MARKET LOSSES ON RESTATEMENT OF OUTSTANDING FORWARD CONTRACTS. THE AO NOTICED T HAT THE ASSESSEE HAS VALUED OUTSTANDING FOREIGN EXCHANGE FORWARD CON TRACTS AS AT THE YEAR END AND THE SAME HAS RESULTED IN A LOSS OF 141.63 LAKHS AND 1097.00 LAKHS RESPECTIVELY IN ASST. YEAR 2011-1 2 AND 2012-13. BY TAKING SUPPORT OF CBDT INSTRUCTION NO.3 OF 2010 DATED 23/3/2010, THE AO HELD THAT THE SAME IS NOTIONAL LO SS AND ALSO SPECULATIVE IN NATURE. ACCORDINGLY HE DISALLOWED TH E ABOVE SAID CLAIM IN BOTH THE YEARS. THE LD CIT(A) ALSO CONFIR MED THE SAME. 4. THE LD AR SUBMITTED THAT CLAIM OF THE ASSESSEE I S SUPPORTED BY THE DECISION RENDERED BY COORDINATE BENCH IN THE CASE OF QUALITY ENGINEERING AND SOFTWARE TECHNOLOGIES PVT. LTD., VS . DCIT (2014) 52 TAXMANN.COM 515, WHEREIN THE TRIBUNAL HAS HELD T HAT THE FORWARD CONTRACT ENTERED IN ORDER TO PROTECT THE IN TEREST OF THE ASSESSEE AGAINST FLUCTUATIONS IN FOREIGN CURRENCY I N RESPECT OF CONSIDERATION RECEIVABLE FOR EXPORTS MADE WOULD NO T QUALIFIED TO BE CALLED AS SPECULATIVE TRANSACTION AND HENCE THE PRO VISION FOR LOSSES INCURRED ON DERIVATIVE CONTRACTS IS AN ALLOWABLE EX PENDITURE. 5. ON THE CONTRARY, THE LD DR SUPPORTED THE ORDER PASSED BY THE LD CIT(A). HE RELIED ON THE INSTRUCTION ISSUED BY CBD T AND SUBMITTED THAT THE SAID LOSS IS NOTIONAL ONE. THE LD DR ALSO SUBMITTED THAT THE ASSESSEE, IN ANY CASE, HAS NOT SHOWN THE NEXUS BETWEEN ITA NOS.1811/BANG/2016 & 1202/BANG/2017 PAGE 3 OF 10 OUTSTANDING FORWARD CONTRACTS AND IMPORT/EXPORT ACT IVITIES OF THE ASSESSEE. 6. WE HEARD THE PARTIES ON THIS ISSUE AND PERUSED T HE RECORD. WE NOTICED THAT COORDINATE BENCH HAS HELD IN THE CA SE OF QUALITY ENGINEERING AND SOFTWARE TECHNOLOGIES PVT. LTD., TH AT THE PROVISION MADE FOR LOSSES INCURRED ON DERIVATIVE CONTRACTS IS AN ALLOWABLE EXPENDITURE, SINCE THEY ARE ENTERED INTO IN ORDER T O PROTECT THE INTERESTS OF ASSESSEE AGAINST LOSS ARISING ON ACCOU NT OF FOREIGN EXCHANGE FLUCTUATIONS WHILE REALIZING THE EXPORT PR OCEEDS. WE NOTICED THAT THE SAID DECISION WAS RENDERED AFTER C ONSIDERING THE CBDT INSTRUCTION NO.3/12, ON WHICH THE AO HAD PLACE D RELIANCE. HENCE, THE CLAIM OF THE ASSESSEE IS, IN PRINCIPLE, ALLOWABLE. HOWEVER, AS RIGHTLY POINTED OUT BY LD DR, THE ASSE SSEE SHOULD ESTABLISH THE NEXUS BETWEEN THE OUTSTANDING FORWARD CONTRACTS AND IMPORT/EXPORT ACTIVITIES OF THE ASSESSEE. HENCE, F OR THE LIMITED PURPOSE OF VERIFICATION OF NEXUS REFERRED ABOVE, WE RESTORE THIS ISSUE TO THE FILE OF THE AO IN BOTH THE YEARS UNDER CONSI DERATION TO EXAMINE THE ISSUE AFRESH BY FOLLOWING THE DECISION RENDERED IN THE CASE OF QUALITY ENGINEERING AND SOFTWARE TECHNOLOGI ES PVT. LTD. (SUPRA). NEEDLESS TO MENTION THE ASSESSEE SHOULD B E GIVEN PROPER OPPORTUNITY OF BEING HEARD. THE ORDER PASSED BY THE LD CIT(A) IS SET ASIDE ACCORDINGLY. 7. THE NEXT COMMON ISSUE RELATES TO DISALLOWANCE MA DE U/S 14A OF THE ACT. THE ASSESSEE RECEIVED DIVIDEND INCOME OF RS.268.66 LAKHS AND 630.84 LAKHS DURING THE PREVIOUS YEARS RE LEVANT TO THE ASST. YEARS 2011-12 AND 2012-13 RESPECTIVELY. THE ASSESSEE DID NOT ITA NOS.1811/BANG/2016 & 1202/BANG/2017 PAGE 4 OF 10 MAKE ANY DISALLOWANCE U/S 14A OF THE ACT. BEFORE T HE AO THE ASSESSEE CONTENDED THAT IT DID NOT INCUR ANY SPECIF IC EXPENDITURE IN EARNING THE DIVIDEND INCOME AND ACCORDINGLY CONTEND ED THAT NO DISALLOWANCE U/S 14A IS CALLED FOR. THE AO DID NOT AGREE WITH THE CONTENTIONS OF THE ASSESSEE AND HE TOOK THE VIEW TH AT A PORTION OF ADMINISTRATIVE EXPENSES SHOULD BE DISALLOWED BY APP LYING RULE 8D(2)(III) OF THE INCOME-TAX RULE. ACCORDINGLY THE AO DISALLOWED 0.5% OF THE AVERAGE VALUE OF INVESTMENT IN BOTH THE YEARS WHICH WORKED OUT 46.43 LAKHS AND 11.75 LAKHS RESPECTIVELY IN ASST. YEAR 2011-12 AND 2012-13. THE LD CIT(A) CONFIRMED THE S AME. 8. THE LD AR SUBMITTED THAT THE ASSESSEE HAS MADE I NVESTMENTS OF ITS SURPLUS FUNDS IN THE SCHEMES OF VARIOUS MUTU AL FUNDS WHICH DO NOT REQUIRE CRITICAL ANALYSIS. THE AR ACCORDING LY SUBMITTED THAT THE PROVISION OF RULE 8D(2)(III) SHOULD NOT BE APPL IED IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THE LD AR ALSO TOOK UP SUPPORT OF DECISION RENDERED BY MUMBAI BENCH OF ITAT SVITZER HAZIRA PVT. LTD., (2017) 85 TAXMANN.COM 91 (MUMB TRIB.), WHE REIN THE TRIBUNAL, ON IDENTICAL SET OF FACTS, HAS MADE ADHO C DISALLOWANCE BY OBSERVING THAT THE PROVISION OF RULE 8D(2)(III) NE ED NOT BE APPLIED. 9. WE HEARD THE LD DR AND PERUSED THE RECORD. WE N OTICED THAT THE ASSESEE HELD INVESTMENTS IN MUTUAL FUNDS ONLY. THE ASSESSEE HAS HELD INVESTMENT IN 7 SCHEMES AND IN 3 SCHEMES A S ON 1/4/2010 AND 31/3/2011 RESPECTIVELY. IT IS AN ADMI TTED FACT THAT THE INVESTMENT IN MUTUAL FUND SCHEME DOES NOT INVOL VE CRITICAL ANALYSIS AS MAY BE REQUIRED WHILE MAKING INVESTMENT S IN SHARES. HENCE, THERE IS MERIT IN THE CONTENTION OF THE ASSE SSEE THAT THE ITA NOS.1811/BANG/2016 & 1202/BANG/2017 PAGE 5 OF 10 PROVISION OF RULE 8D(2)(III) NEED NOT BE APPLIED IN THE FACTS AND CIRCUMSTANCES OF THE CASE. AT THE SAME TIME, THE A CTIVITIES CONNECTED THERETO, VIZ., MAKING INVESTMENTS IN THE MUTUAL FUNDS SCHEMES, REDEMPTION THEREOF, RECEIPT OF DIVIDEND ET C. WOULD CONSUME SOME OF THE ADMINISTRATIVE EXPENSES. HENCE , DISALLOWANCE US/ 14A OF THE ACT IS CALLED FOR AND IT MAY BE ESTI MATED ON ADHOC BASIS, IN THE FACTS AND CIRCUMSTANCES OF THE CASE. CONSIDERING THE DIVIDEND INCOME RECEIVED AND THE ACTIVITIES UNDERTA KEN IN MAKING INVESTMENTS IN MUTUAL FUND SCHEMES AND REDEMPTION T HEREOF, WE ARE OF THE VIEW THAT THE DISALLOWANCE OF RS.25,000/ - AND RS.50,000/- MAY BE MADE RESPECTIVELY IN ASST. YEAR 2011-12 AND 2012-13 AND IN OUR VIEW THE SAME WOULD MEET THE REQ UIREMENTS OF SEC. 14A OF THE ACT. ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE IN BOTH THE YEARS AND DIRECT T HE AO TO RESTRICT THE DISALLOWANCE TO THE EXTENT SATED ABOVE IN THE YEARS UNDER CONSIDERATION. 10. NOW WE SHALL TAKE UP INDIVIDUAL ISSUES AGITATE D IN BOTH THE YEARS. 11. IN ASST. YEAR 2011-12, THE ASSESSEE IS AGITATIN G THE DISALLOWANCE OF DEPRECIATION CLAIMED ON PRE OPERATI VE EXPENSES. THE AO NOTICED THAT THE ASSESSEE HAS CAPITALIZED PR E OPERATIVE EXPENSES AND CLAIMED DEPRECIATION THEREON. THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY DEPRECATION CLAIMED O N THESE EXPENSES SHOULD NOT BE DISALLOWED. SINCE THE ASSESS EE DID NOT FURNISH ANY REPLY, THE AO DISALLOWED THE DEPRECIATI ON OF RS.25.91 LAKHS CLAIMED ON PRE OPERATIVE EXPENSES. THE LD CI T(A) ALSO ITA NOS.1811/BANG/2016 & 1202/BANG/2017 PAGE 6 OF 10 CONFIRMED THE SAME, SINCE THE ASSESSEE DID NOT FURN ISH ANY REPLY BEFORE HIM ALSO. 12. THE LD AR SUBMITTED THAT THE ASSESSEE, FOR SOME UNAVOIDABLE REASONS, COULD NOT FURNISH PROPER REPLY TO THE TAX AUTHORITIES AND ACCORDINGLY PRAYED THAT THE ASSESSEE MAY BE PROVIDE D WITH ONE MORE OPPORTUNITY TO FURNISH RELEVANT DETAILS BEFORE THE AO. 13. WE HEARD THE LD DR AND PERUSED THE RECORD. IN THE INTEREST OF NATURAL JUSTICE, WE ARE OF THE VIEW THAT THE ASSESS EE MAY BE PROVIDED WITH ONE MORE OPPORTUNITY TO FURNISH THE D ETAILS THAT WERE CALLED FOR BY THE AO. ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY THE LD CIT(A) AND RESTORE THIS ISSUE TO THE FILE OF THE AO FOR EXAMINING IT AFRESH. 14. IN AY 2012-13, THE ASSESSEE IS AGITATING THE DE CISION OF LD CIT(A) IN CONFIRMING THE ASSESSMENT OF INTEREST REC EIVED FROM INTER CORPORATE DEPOSITS AS INCOME CHARGEABLE TO TAX UNDE R THE HEAD INCOME FROM OTHER SOURCES AND ALSO IN REJECTING THE CLAIM OF THE ASSESSEE FOR NETTING OF INTEREST INCOME AGAINST INT EREST PAID ON BORROWED FUNDS. 15. WE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. THE AO NOTICED THAT THE ASSESSEE HAS ADVANCED A SUM OF RS.200 CORES AS INTER-CORPORATE DEPOSITS TO M/S LANCO IN FRATECH LTD. THE ASSESSEE CLAIMED THAT IT HAD TAKEN LOAN OF 200 CROR ES FROM BANK OF INDIA AND ADVANCED THE SAME TO M/S LANCO INFRATECH LTD. THE ASSESSEE RECEIVED INTEREST INCOME OF RS.31.08 CRORE S FROM THE INTER- ITA NOS.1811/BANG/2016 & 1202/BANG/2017 PAGE 7 OF 10 CORPORATE DEPOSIT AND CLAIMED EQUAL AMOUNT AS INTER EST EXPENDITURE ON LOAN TAKEN FROM BANK OF INDIA AND AC CORDINGLY DECLARED NIL INCOME FROM THE ABOVE TRANSACTIONS. T HE AO NOTICED THAT THE ASSESSEE HAS CAPITALIZED OTHER INTEREST PA YABLE ON BANK LOANS, SINCE THE POWER PLANTS WERE STILL UNDER EREC TION AND YET TO BE COMMISSIONED. HE FURTHER NOTICED THAT THE LOAN OF RS.200 CRORES HAS BEEN TAKEN BY THE ASSESSEE AS MEZZANINE DEBT IN CONNECTION WITH THE CONSTRUCTION OF POWER PROJECT. ACCORDINGL Y HE TOOK THE VIEW THAT THE INTEREST PAYABLE ON THE LOAN OF RS.20 0 CRORES TAKEN FROM THE BANK SHOULD ALSO BE CAPITALIZED. HE FURTH ER TOOK THE VIEW THAT THE INCOME EARNED BY THE ASSESSEE FROM INTER-C ORPORATE DEPOSIT IS ASSESSABLE AS INCOME FROM OTHER SOURCES AS PER THE DECISION RENDERED BY THE HONBLE SUPREME COURT IN THE CASE O F TUTICORIN ALCOHOLIC CHEMICALS AND FERTILIZERS LTD., VS. CIT 2 27 ITR 172. ACCORDINGLY HE ASSESSED THE INTEREST INCOME OF RS.3 1. 08 CRORES AS INCOME OF THE ASSESSEE UNDER THE HEAD INCOME FROM OTHER SOURCES AND DID NOT ALLOW DEDUCTION OF INTER EST EXPENDITURE. THE LD CIT(A) ALSO REJECTED THE CLAIM OF THE ASSESS EE FOR SET OFF OF INTEREST INCOME AGAINST THE INTEREST EXPENDITURE AN D ACCORDINGLY CONFIRMED THE ACTION OF THE AO IN ASSESSING THE INT EREST INCOME AS INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. 16. FROM THE FACTS DISCUSSED ABOVE, WE NOTICE THAT THE ASSESSEE HAS BORROWED RS.200 CRORES FROM BANK OF INDIA AND L ENT THE SAME AS INTER-CORPORATE DEPOSITS TO M/S LANCO INFRATECH LTD. THE AO/CIT(A) NOTICED THAT THE ASSESSEE HAS TAKEN THE A BOVE SAID LOAN AS MEZZANINE DEBIT FOR THE PURPOSE OF EXECUTION O F POWER PROJECT AND HENCE THE INTEREST EXPENDITURE SHOULD HAVE BEEN CAPITALIZED BY ITA NOS.1811/BANG/2016 & 1202/BANG/2017 PAGE 8 OF 10 THE ASSESSEE. ACCORDINGLY THE AO DISALLOWED THE IN TEREST EXPENDITURE CLAIM. 17. HOWEVER, THE SUBMISSION OF THE ASSESSEE IS THAT THE ABOVE SAID LOAN OF RS.200 CRORES HAVE BEEN LENT AS INTER CORPORATE DEPOSIT AND HENCE THERE IS DIRECT NEXUS BETWEEN THE LOAN TA KEN FROM BANK AND THE INTER-CORPORATE DEPOSIT MADE. IF THE ASSES SEE IS ABLE TO ESTABLISH DIRECT NEXUS, THEN THE INTEREST PAYABLE O N BANK LOAN CAN BE CLAIMED AS DEDUCTION AGAINST INTEREST INCOME EAR NED FROM INTER- CORPORATE DEPOSIT. THE QUESTION OF CAPITALIZATION OF INTEREST SHALL ARISE ONLY IF THE CONCERNED LOAN IS USED FOR THE PU RPOSE OF CONSTRUCTION OF POWER PROJECT. HERE, IT IS THE SUB MISSION OF THE ASSESSEE THAT IT HAS USED THE BANK LOAN OF RS.200 C RORES FOR GIVING INTER-CORPORATE DEPOSIT. USER OF THE LOAN SHALL DE TERMINE THE TREATMENT OF INTEREST EXPENDITURE UNDER THE ACT. 18. WE NOTICE THAT THE ASSESSEE HAS CLAIMED EQU AL AMOUNT OF INTEREST INCOME AS INTEREST EXPENDITURE. IT CLAIME D TO HAVE RECEIVED INTEREST INCOME @ 15% ON INTER-CORPORATE DEPOSIT. HOWEVER, THE DETAILS OF INTEREST EXPENDITURE PAYABLE ON THE BANK LOANS WERE NOT AVAILABLE ON RECORD. HENCE THIS ASPECT ALSO REQUIR ES VERIFICATION. 19. ACCORDINGLY, WE ARE OF THE VIEW THAT THIS IS SUE REQUIRES FRESH EXAMINATION AT THE END OF THE AO FOR THE PURPOSE OF EXAMINING NEXUS BETWEEN BORROWED FUNDS AND THE DETAILS OF INT EREST EXPENDITURE PAYABLE ON IT. ACCORDINGLY WE SET ASID E THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND RESTORE THE S AME TO THE FILE OF THE AO FOR EXAMINING THIS ISSUE AFRESH IN THE LIGHT OF DISCUSSIONS ITA NOS.1811/BANG/2016 & 1202/BANG/2017 PAGE 9 OF 10 MADE SUPRA. SINCE WE HAVE RESTORED THIS ISSUE, WE ALSO RESTORE THE ISSUE OF THE HEAD OF INCOME UNDER WHICH THE INTERES T INCOME IS ASSESSABLE ALSO TO THE FILE OF THE AO, AS THE SAME IS CONNECTED ISSUE. 20. IN THE RESULT, BOTH THE APPEALS OF THE ASSES SEE ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH JUNE, 2019. SD/ - (N.V VASUDEVAN) VICE PRESIDENT SD/ - (B.R BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED, 26 TH JUNE, 2019. / VMS / COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3 . THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER A SST. REGISTRAR, ITAT, BANGALORE. ITA NOS.1811/BANG/2016 & 1202/BANG/2017 PAGE 10 OF 10 1. DATE OF DICTATION 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER . 3. DATE ON WHICH THE APPROVED DRAFT COMES TO SR.P.S .. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER .. 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S. .. 6. DATE OF UPLOADING THE ORDER ON WEBSITE.. 7. IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO .. 8. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. DATE ON WHICH ORDER GOES FOR XEROX & ENDORSEMENT 10. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 11. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER . 12. THE DATE ON WHICH THE FILE GOES TO DISPATCH SEC TION FOR DISPATCH OF THE TRIBUNAL ORDER . 13. DATE OF DESPATCH OF ORDER. ..