THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 1392/HYD/2014 ASSESSMENT YEAR: 2007-08 THE DY INCOME TAX OFFICER CIRCLE 1(2) HYDERABAD VS. M/S BHAGYANAGAR INDIA PVT. LTD., SECUNDERABAD PAN AAACB8963C (APPELLANT) (RESPONDENT) REVENUE BY : SHRI P. CHANDRASEKHAR ASSESSEE BY : SHRI K.C. DEVDAS DATE OF HEARING : 04-01-2017 DATE OF PRONOUNCEMENT : 31-01-2017 ORDER PER P. MADHAVI DEVI, J.M.: THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT(A)-II, HYDERABAD, 09-05-2014. IN T HIS APPEAL THE GROUNDS RAISED BY THE REVENUE ARE AS UND ER: 1. THE LD. CIT(A) ERRED ON FACTS IN ALLOWING ASSES SEES APPEAL. 2. THE LD. CIT(A) ERRED IN DIRECTING THE A.O TO ALL OW FULL EXPENDITURE OF RS. 3,16,63,058/- ON ACCOUNT OF EXPE NSES ON ISSUE OF FCCB BONDS AS WHOLLY AND EXCLUSIVELY INCUR RED FOR CARRYING ON BUSINESS WITHOUT APPRECIATING THE FACT THAT THE MONEY RAISED THROUGH FCCB WERE INVESTED IN SUBSIDIA RIES AND AS SUCH NOT USED FOR THE PURPOSE OF BUSINESS. 3. ANY OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE C OMPANY, ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE O F COPPER PRODUCTS, JELLY FILLED CABLES AND ALSO ENGAG ED IN THE 2 ITA NO. 1392/HYD/2014 M/S BHAGYANAGAR INDIA PVT. LTD., HYDERABAD. BUSINESS OF REAL-ESTATE, FILED ITS RETURN OF INCOME ELECTRONICALLY FOR THE RELEVANT ASSESSMENT YEAR ON 30-10- 2007, ADMITTING INCOME OF RS. 46,00,87,206. THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF TH E ACT ON 12-06-2009 DETERMINING THE TOTAL INCOME OF RS. 46,10,76,525. 3. THEREAFTER, THE CIT PASSED AN ORDER U/S 263 OF T HE ACT ON 27-12-2011 SETTING ASIDE THE ASSESSMENT WITH A DIRECTION TO THE A.O TO RE-DO THE ASSESSMENT IN ACC ORDANCE WITH LAW. ALONG WITH THE SAID ORDER U/S 263 OF THE ACT, THE CIT ALSO PASSED AN ORDER U/S 264 DIRECTING THE A.O THE EXAMINE THE ISSUE OF EXPENDITURE ON FCCBS AND DECID E THE ALLOWABILITY OF THE SAID EXPENDITURE. CONSEQUENT T O THE ORDERS U/S 263 AND 264 OF THE IT ACT, THE A.O COMPL ETED THE ASSESSMENT U/S 143(3) OF THE ACT R.W.S 263 AND 264 OF THE IT ACT, BY ORDER DATED 06-03-2013. 4. DURING THE COURSE OF SUCH ASSESSMENT PROCEEDINGS , THE A.O OBSERVED THAT THE ASSESSEE HAS INCURRED AN EXPENDITURE OF RS 3,16,63,000 FOR ISSUANCE OF 150 F CCBS, EACH WORTH OF US $ ONE LAKH AND IN ITS COMPUTATION OF INCOME THE ASSESSEE HAS AMORTIZED THE SAME U/S 35D OF THE ACT OVER FIVE YEARS STARTING FROM ASSESSMENT YE AR 2007- 08. THE A.O OBSERVED THAT THE SAID EXPENDITURE IS NOT ALLOWABLE U/S 35D OF THE ACT. THEREAFTER, HE PROCE EDED TO CONSIDER WHETHER THE EXPENDITURE WAS ALLOWABLE U/S 37 OF THE ACT AND OBSERVED THAT THOUGH THE ASSESSEE STATE D THAT FCCB PROCEEDS HAVE BEEN UTILISED FOR THE PURPOSE OF 3 ITA NO. 1392/HYD/2014 M/S BHAGYANAGAR INDIA PVT. LTD., HYDERABAD. ACQUIRING FIXED ASSETS, THE FUNDS WERE ACTUALLY UTI LISED FOR ADVANCEMENT OF LOANS TO THE ASSESSEES SUBSIDIARIES . THEREFORE, THE A.O WAS OF THE OPINION THAT THE FCCB S WERE NOT UTILIZED FOR THE BUSINESS PURPOSES OF THE ASSES SEE AND THEREFORE IS NOT ALLOWABLE U/S 37 OF THE ACT. 5. THERE AFTER, THE A.O FURTHER PROCEEDED TO CONSID ER THE GENUINENESS OF THE CLAIM AND OBSERVED THAT THE ASSE SSEE HAS FAILED TO PRODUCE THE CERTIFICATES / COPIES OF THE LEDGER ACCOUNTS OF THE ASSESSEE COMPANY IN THE BOOKS OF AC COUNTS OF M/S SILVER DALE SERVICES LTD. FOR THE F.Y 2006- 07 ALONG WITH THE IT RETURN COPIES FOR THE ASSESSMENT YEAR20 07-08. THE A.O, THEREFORE, DISALLOWED THE CLAIM OF RS. 3,16,63,000/-. AGGRIEVED THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHO ALLOWED THE SAME BY TAKING IN TO CONSIDERATION THE ORDER OF THE ITAT FOR THE A.Y 200 8-09 AND 2009-10 IN ITA NOS. 99 & 1435/HYD/2012 DATED 10-05- 2013 AND ALSO IN M.A NOS. 148 & 149/HYD/2013. AGGRIEVED BY THE RELIEF GRANTED BY THE CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 6. THE LD. DR SUPPORTED THE ORDER OF THE A.O, WHILE THE LD. COUNSEL FOR THE ASSESSEE SUPPORTED THE ORDER OF THE CIT(A). 7. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE ONLY ISSUE BEF ORE US IS WHETHER THE EXPENDITURE INCURRED BY THE ASSESSEE FO R THE ISSUANCE OF FCCBS IS ALLOWABLE AS DEDUCTION U/S 37 OF THE 4 ITA NO. 1392/HYD/2014 M/S BHAGYANAGAR INDIA PVT. LTD., HYDERABAD. INCOME TAX ACT. WE FIND THAT IN ITS BOOKS OF THE A CCOUNT, THE ASSESSEE HAD AMORTIZED THE SAME OVER A PERIOD O F FIVE YEARS AND MADE A CLAIM U/S 35D OF THE ACT. THE ASS ESSING OFFICER IN THE ORIGINAL ASSESSMENT U/S 143(3) OF TH E ACT, HAD ALLOWED AMORTIZATION, BUT, IN THE SUBSEQUENT YE AR I.E 2008-09, THE ASSESSING OFFICER HAD DISALLOWED THE AMORTIZED AMOUNT BY OBSERVING THAT THERE IS NO PROV ISION IN THE INCOME TAX ACT FOR DEFERRING REVENUE EXPEND ITURE. IN VIEW OF THIS FINDING OF THE ASSESSING OFFICER FO R THE A.Y 2008-09, THE ASSESSEE HAD FILED AN APPLICATION U/S 264 OF THE ACT BEFORE THE CIT FOR THE A.Y 2007-08, TO CONS IDER THE ALTERNATE CLAIM OF ALLOWING THE ENTIRE EXPENDITURE U/S 37 OF THE ACT IN THE YEAR OF ISSUE I.E A.Y. 2007-08 ITSEL F. THE CIT, VIDE ORDERS U/S 264 OF THE ACT, HAD DIRECTED T HE A.O TO CONSIDER THE ALLOWABILITY OF THE EXPENDITURE U/S 37 OF THE ACT. IT WAS CONSEQUENT TO THE DIRECTION OF THE CIT THAT THE A.O HAS RE-CONSIDERED THE ISSUE OF ALLOWABILITY OF THE EXPENDITURE U/S 37 OF THE ACT. THE A.O HAS OBSERVE D THAT FOR ALLOWING DEDUCTION U/S 37 OF THE ACT, THE ASSE SSEE HAS TO PROVE THAT THE EXPENDITURE IS WHOLLY AND EXCLUSI VELY INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE COM PANY AND ALSO THAT IT IS NOT CAPITAL IN NATURE. BEFORE T HE A.O AS WELL AS THE CIT(A), THE CLAIM OF THE ASSESSEE HAS B EEN THAT THE FCCBS HAVE BEEN UTILIZED FOR THE PURPOSE OF PURCHASING FIXED ASSETS FOR EXPANSION OF THE ASSESS EE BUSINESS. WE FIND THAT THE A.O HAS HELD THAT THE FC CBS HAVE BEEN DIVERTED TO THE SUBSIDIARIES AND THEREFOR E, THE FUNDS GARNERED BY THE ISSUANCE OF THE FCCBS ARE NO T UTILIZED FOR THE BUSINESS PURPOSES OF THE ASSESSEE. WE FIND THAT THE CIT(A) HAS GIVEN RELIEF TO THE ASSESSEE ON THE 5 ITA NO. 1392/HYD/2014 M/S BHAGYANAGAR INDIA PVT. LTD., HYDERABAD. GROUND THAT THE ITAT IN THE ASSESSEES OWN CASE FOR THE A.Y. 2008-09 AND ALSO 2009-10, WHILE CONSIDERING TH E ALLOWABILITY OF THE AMORTIZED EXPENDITURE U/S 35D O F THE ACT, HAS HELD THAT THE ENTIRE AMOUNT IS ALLOWABLE U /S 37 OF THE ACT. THEREFORE, THE CIT(A) HAS NOT DISCUSSED I N HER ORDER, THE MERITS OF THE ALLOWABILITY OF THE EXPEND ITURE DURING THE A.Y. 2007-08. THERE WAS A QUERY FROM TH E BENCH TO THE LD. COUNSEL FOR THE ASSESSEE AS TO WHE THER THE ASSESSEE HAS FILED THE RETURNS BEFORE THE RBI AS RE GARDS THE USE OF THE FUNDS GARNERED FROM THE BONDS FOR THE PU RPOSES FOR WHICH THE FUNDS HAVE BEEN GARNERED. ON OUR DIRE CTION, THE LD. COUNSEL FOR THE ASSESSEE HAS FILED BEFORE U S THE COPIES OF UTILIZATION STATEMENTS AS INFORMED TO THE BANK / RBI IN THE FORM OF A PAPER BOOK. ON GOING THROUGH THESE DOCUMENTS FILED BEFORE US, IT IS SEEN THAT THE FUND S FROM THE FCCBS ARE CLAIMED TO HAVE BEEN UTILIZED FOR MODERNIZATION / EXPANSION OF EXISTING POWER PLANT A ND ALSO OTHERS. AS LONG AS THE FUNDS OF FCCBS HAVE BEEN U SED FOR BUSINESS PURPOSES OF THE ASSESSEE, THE SAID EXPENDI TURE IS WHOLLY ALLOWABLE AS REVENUE EXPENDITURE IN THE YEAR OF ISSUE. SINCE THESE DOCUMENTS WERE NOT FILED BEFORE THE AUTHORITIES BELOW AND NEED FURTHER VERIFICATION, WE DEEM IT FIT AND PROPER TO REMIT TO THE FILE OF THE A.O ONLY FOR VERIFICATION OF THE DOCUMENTS AND IF IT IS FOUND TH AT THE FUNDS FROM THE FCCBS HAVE BEEN UTILIZED FOR THE PU RPOSES MENTIONED IN THESE DOCUMENTS CERTIFICATES / STATEME NTS, THEN THE ENTIRE EXPENDITURE SHALL BE ALLOWED IN THE A.Y. 2007-08 ITSELF. ACCORDINGLY, THE REVENUES APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 6 ITA NO. 1392/HYD/2014 M/S BHAGYANAGAR INDIA PVT. LTD., HYDERABAD. 8. IN THE RESULT, THE REVENUES APPEAL IS ALLOWED F OR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 31 ST JANUARY , 2017. SD/- SD/- (S. RIFAUR RAHMAN) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 31 ST JANUARY, 2017 KRK 1) M/S BHAGYANAGAR INDIA LTD. 5 TH FLOOR, I.T TOWERS, A.C GUARDS, MASAB TANK, HYDERABAD 2) DY. CIT, CIRCLE-1(2), HYDERABD. 3) CIT(A) -II, HYDERABAD 4) DY CIT-CIRCLE 1(3) HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., H YDERABAD. 6) GUARD FILE