ITO,Ward-1(1), Hyderabad, Hyderabad V. Algorab Power Projects Pvt.Ltd., Hyderabad, Hyderabad

ITA 145/HYD/2015

• Counselvise Citation: 14522514 RSA 2015
• Duration Of Justice: 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 08-12-2015
• Assessment Year: 2011-2012
• Appeal Filed On: 09-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B KURMI NAIDU
• Assessee Lawyers: S RAMA RAO
• Keywords: Capital expenditure

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 145HYD/2015 ASSESSMENT YEAR: 2011-12 INCOME-TAX OFFICER, WARD 1(1), HYDERABAD VS. ALGORAB POWER PROJECTS PVT. LTD., HYDERABAD PAN AAHCA 5925 A (APPELLANT) (RESPONDENT) REVENUE BY : SHRI B. KURMI NAIDU ASSESSEE BY : SHRI S. RAMA RAO DATE OF HEARING : 08-12-2015 DATE OF PRONOUNCEMENT : 18-12-2015 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL IS FILED BY THE REVENUE AGAINST THE OR DER OF CIT(A)- II, HYDERABAD DATED 15/11/2014, FOR THE AY 2011-12 WHEREIN THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED C!T(A) OUGHT TO HAVE UPHELD THE ADD ITION MADE BY THE AD 2. THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED TH E DECISION OF HON'BLE SUPREME COURT IN THE CASE OF MIS. TUTICORIN ALKALI CHEMICALS & FERTILIZER LTD, THE FACTS OF WHICH ARE SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CASE. 3. THE LEARNED C!T(A) OUGHT TO HAVE APPRECIATED TH AT THE FACT THAT THE ASSESSEE HAS NOT COMMENCED ITS BUSINESS. 4. THE LEARNED C!T(A) ERRED IN ALLOWING THE SET OF F OF INTEREST PAID AGAINST THE INTEREST RECEIVED IGNORING THE FACT THAT THE A SSESSEE IS NOT INTO THE BUSINESS OF MONEY LENDING WHEN THE ASSESSEE HAS BO RROWED SAID FUNDS FOR THE PURPOSE OF BUSINESS ACTIVITIES. 5. ANY OTHER GROUND THAT MAY BE URGED AT THE TIME OF HEARING. 2. BRIEFLY THE FACTS OF THE CASE ARE, THE ASSESSEE COMPANY WAS INCORPORATED ON 05/03/2009 FOR THE PURPOSE OF SETTI NG UP OF POWER 2 ITA NO. 145 /HYD/2015 ALGORAB POWER PROJECTS PVT. LTD. PROJECTS. FOR AY 2011-12, IT HAD FILED RETURN OF LO SS OF RS. 12,745/- ON 27/09/2011. DURING THE FY RELEVANT TO THE AY UNDER CONSIDERATION, THE ASSESSEE WAS IN THE PRE-COMMENCEMENT PERIOD OF ITS BUSINESS OPERATIONS AND HAD RECEIVED AMOUNTS FROM ITS DIRECT ORS TOWARDS UNSECURED LOANS. OUT OF THE FUNDS RECEIVED, RS. 10 CRORES WAS INVESTED IN OPTIONALLY FULLY CONVERTIBLE DEBENTURES (OFCD) OF M/S GUJARAT NATURAL RESOURCES LTD.. INTEREST OF RS. 1,0 5,00,000 WAS EARNED ON THE OFCDS AND IN THE STATEMENT OF COMPUTA TION OF TOTAL INCOME LOSS OF RS. 12,745/- WAS ADMITTED AS PER THE P&L A/C AFTER SET OFF AGAINST ADMINISTRATIVE EXPENSES. 2.1 DURING THE COURSE OF ASSESSMENT PROCEEDING, WHE N AO ASKED ASSESSEE AS TO WHY THE ABOVE INTEREST INCOME OF RS. 1,05,00,000 EARNED ON THE OFCDS SHOULD NOT BE ASSESSED AS INCO ME FROM OTHER SOURCES AS THE BUSINESS HAS NOT COMMENCED DURING T HE ASSESSMENT YEAR UNDER CONSIDERATION, THE DIRECTOR MR. TARAK SH AHA OF ASSESSEE COMPANY SUBMITTED THAT THE LOANS RAISED FROM THE DI RECTORS WERE UTILIZED FOR INVESTMENT IN THE OFCDS AND EVEN IF TH E INTEREST ON OFCD IS TREATED AS INCOME FROM OTHER SOURCES, SET OFF HA S TO BE GIVEN FOR THE INTEREST PAID. 2.2 AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, THE AO REFERRING THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILISERS LTD. [997] 227 ITR 172 AND THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF M/S SPONGE IRON INDIA LTD, 201 ITR 770, HELD THAT THE I NTEREST INCOME GENERATED FROM THE OFCD IS REVENUE IN NATURE AND WO ULD HAVE TO BE CONSIDERED UNDER THE HEAD INCOME FROM OTHER SOURCE S . ACCORDINGLY, THE SAID INTEREST OF RS. 1,05,00,000 EARNED ON OFCD S WAS CONSIDERED UNDER THE HEAD INCOME FROM OTHER SOURCES AND ADDE D THE SAME TO THE RETURNED INCOME OF ASSESSEE. 3. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE CIT(A). 3 ITA NO. 145 /HYD/2015 ALGORAB POWER PROJECTS PVT. LTD. 4. BEFORE THE CIT(A) , BESIDES REITERATING THE SUBM ISSIONS AS MADE BEFORE AO, IT WAS SUBMITTED THAT THERE IS DIRECT NE XUS BETWEEN THE LOANS TAKEN BY THE COMPANY FROM ITS DIRECTORS AND T HE INVESTMENT MADE IN M/S GUJARAT NATURAL RESOURCES LTD. THE COMP ANY TOOK LOANS FROM THE DIRECTORS BY AGREEING TO PAY 14% ON THE L OANS BORROWED. THE COMPANY INVESTED THE BORROWED FUNDS IN OFCDS AN D RECEIVED INTEREST OF RS. 1,05,00,000/-. ACCORDINGLY, ASSESSE E CLAIMED THE SET OFF OF INTEREST PAID AGAINST THE INTEREST RECEIVED. 5. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, THE CIT(A) REFERRING TO THE PROVISIONS OF SECTION 57 OF THE IN COME-TAX ACT, 1961 (IN SHORT ACT) OBSERVED THAT THE EXPENSES WHICH W ERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING SUCH INC OME ARE TO BE ALLOWED IN COMPUTING INCOME FROM OTHER SOURCES. REF ERRING TO THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE O F TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. (SUPRA), THE CIT(A) OB SERVED THAT THE FACTS IN THE SAID CASE WERE DIFFERENT AS IN THAT CA SE THE COMPANY HAD NOT COMMENCED ITS BUSINESS, BUT IT TAKEN LOANS FOR BUSINESS PURPOSE. SINCE SUCH LOANS COULD NOT BE UTILIZED, IT HAD TEMP ORARILY PARKED ITS FUNDS WITH THE BANK AND DERIVED INTEREST. IN SUCH C IRCUMSTANCES, THE HONBLE SUPREME COURT HELD THAT THE INTEREST PAID O N LOANS TAKEN FOR PURPOSE OF BUSINESS CANNOT BE SET OFF AGAINST THE I NTEREST EARNED AND TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES. 5.1 THE CIT(A) RELIED ON THE DECISIONS OF CIT VS. B OKARO STEEL LTD., [1999] 236 ITR 315 (SC), CIT VS. KARNATAKA POWER CO RPORATION [2000] 247 ITR 268(SC) AND CIT VS. VGR FOUNDATIONS [2008] 298 ITR 132 (MAD.). IN THE SAID CASES, IT WAS HELD THAT INTEREST ON MONEYS BORROWED FOR THE PERIOD PRIOR TO COMMENCEMENT OF BU SINESS IS ALLOWABLE AS DEDUCTION U/S 57 AGAINST INTEREST INCO ME WHILE COMPUTING INCOME FROM OTHER SOURCES. FOLLOWING THE SAID RATION, THE CIT(A) ALLOWED THE INTEREST CLAIM OF ASSESSEE U/S 5 7(III). 4 ITA NO. 145 /HYD/2015 ALGORAB POWER PROJECTS PVT. LTD. 6. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 7. WE HAVE HEARD THE SUBMISSIONS OF BOTH THE PARTIE S AND PERUSED THE RELEVANT MATERIAL ON RECORD AS WELL AS THE ORDE RS OF REVENUE AUTHORITIES. THE ASSESSEE IS IN THE PRE-COMMENCEME NT PERIOD OF ITS BUSINESS OPERATIONS AND THE COMPANY WAS INCORPORATE D ON 28/02/2009. FOR THE PURPOSE OF SUBSCRIPTION OF OPTI MALLY FULLY CONVERTIBLE DEBENTURES IN M/S GUJARAT NATURAL RESOU RCES LTD., BORROWED SHORT TERM LOAN FROM ITS TWO DIRECTORS. TH E SAME WAS FACILITATED BY THE INSTRUMENT ENTERED ON 01/08/2009 . (REFER PAGES 46 AND 49 OF THE PAPER BOOK). FROM THE ABOVE ARRANGEME NT, IT WAS CLEAR THAT THE LOAN WAS TAKEN PURELY TO INVEST IN THE ABO VE DEBENTURES. THE FACT THAT THE ASSESSEE DID NOT POSSESS THE REQUIRED FUNDS TO MAKE INVESTMENT IN THE DEBENTURES. THE SAME WAS BORROWED AFTER PASSING RESOLUTION DATED 01/08/2009 AND BORROWED THE SAME F ROM ITS DIRECTORS. AS PER THE AGREEMENT ENTERED WITH THEM, IT IS AGREED TO PAY INTEREST @ 14% AND THE SAME RATE THE DEBENTURES WOU LD FETCH. THERE EXISTS DIRECT CONNECTION/NEXUS WITH THE INVESTMENT AND BORROWAL OF FUNDS FROM ITS DIRECTORS. FOR THE ASSESSEE, THE EAR NING OF INCOME AND PAYMENT OF INTEREST ARE CONNECTED AND IN THE NATURE OF REVENUE INCOME AND EXPENDITURE. IT IS APPROPRIATE TO REFER THE SECTION 57(III) AS BELOW: THE INCOME CHARGEABLE UNDER THE HEAD INCOME FROM O THER SOURCES SHALL BE COMPUTED AFTER MAKING THE FOLLOWING DEDUCTIONS, NAMELY, :- I).. II) III) ANY OTHER EXPENDITURE (NOT BEING IN THE NATUR E OF CAPITAL EXPENDITURE) LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR TH E PURPOSE OF MAKING OR EARNING SUCH INCOME FROM THE ABOVE, IT IS CLEAR THAT THE EXPENDITURE IN CURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING SUCH INCOME IS DEDUCTIBLE AS EXPENDITURE. CONSIDERING THE ABOVE INVESTMENT AND R ELATED EXPENDITURE, WE ARE OF THE VIEW THAT THE INVESTMENT DECISION WAS 5 ITA NO. 145 /HYD/2015 ALGORAB POWER PROJECTS PVT. LTD. TAKEN ONLY TO EARN THE INTEREST AND THE SHORT TERM LOAN WAS BORROWED TO MAKE THE INVESTMENT. THE SOURCE AND INVESTMENT W ERE SUBMITTED BY WAY OF BANK STATEMENT BY LD. AR AT PAGE 41 OF TH E PAPER BOOK. IT CLEARLY ESTABLISHES THE NATURE OF INVESTMENT AND CO RRESPONDING BORROWAL WITH THE REVENUE COMMITMENT OF INTEREST. H ENCE, THE INTEREST PAYMENT WAS DIRECTLY LINKED TO THE EARNING OF THE I NCOME. HENCE, THE INCOME CAN BE CONSIDERED AS INCOME FROM OTHER SOURC ES, AT THE SAME TIME, THE INTEREST EXPENDITURE SHOULD ALSO BE TREAT ED AS RELATABLE EXPENDITURE TO EARN THE ABOVE INCOME. IN VIEW OF TH E ABOVE OBSERVATIONS, WE ARE OF THE VIEW THAT THERE IS NO I NFIRMITY IN THE ORDER OF THE CIT(A) IN ALLOWING THE CLAIM OF ASSESSEE FOL LOWING THE JUDGMENTS OF THE HONBLE SUPREME COURT AND HONBLE MADRAS HIGH COURT CITED SUPRA. ACCORDINGLY, WE UPHOLD THE ORDER OF CIT(A) AND DISMISS THE GROUNDS RAISED BY THE REVENUE ON THIS I SSUE. 8. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. PRONOUNCED IN THE OPEN COURT ON 18 TH DECEMBER, 2015. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 18 TH DECEMBER, 2015 KV COPY TO:- 1) ITO, WARD 1(1), 4 TH FLOOR, AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 2) M/S ALGORAB POWER PROJECTS PVT. LTD., P.NO. F. N O. 403, PADMASAI TOWER, MOTHI NAGAR, HYDERABAD - 18 3 CIT(A)-II, HYDERABAD 4) CIT-I, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., H YDERABAD. 6 ITA NO. 145 /HYD/2015 ALGORAB POWER PROJECTS PVT. LTD. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S. 2. DRAFT PLACED BEFORE AUTHOR SR.P.S 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER VP 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S. 6. KEPT FOR PRONOUNCEMENT ON SR.P S. 7. FILE SENT TO THE BENCH CLERK SR.P.S. 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER