Tamil Nadu Urban Development Fund, CHENNAI V. DCIT, CHENNAI

ITA 1469/CHNY/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 7416 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 9 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-03-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 05-06-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PUSHYA SITARAMAN
• Keywords: Earning of tax free income; Question of law; Rule 8D
• Section: 143(3); 14A; 260A; 44AB

Judgement Text

आयकर अपीलीय अिधकरण, ‘ए’ ᭠यायपीठ, चे᳖ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH, CHENNAI Įी महावीर ͧसंह, उपाÚय¢ एवं डॉ एम एल मीना, लेखा सदèय के सम¢ BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENTAND Dr. M.L. MEENA, ACCOUNTANT MEMBER आयकर अपील सं./ITA Nos.: 388, 1468, 1469 & 1470/CHNY/2017, 573 & 574/CHNY/2020 िनधाᭅरण वषᭅ /Assessment Years:2013-14, 2010-11, 2011-12 & 2012-13, 2014-15 & 2015-16 M/s. Tamil Nadu Urban Development Fund, No. 19 T P Scheme Road, Raja Street Extension, Raja Annamalaipuram, Chennai – 600 028. PAN: AAATT 0859N v. The DCIT, Non Corporate Circle -2, Chennai -34. (अपीलाथᱮ/Appellant) (ᮧ᭜यथᱮ/Respondent) अपीलाथᱮ कᳱ ओर से/Appellant by : Smt. Pushya Sitaraman, Sr. Advocate for Shri Arun Kurian Joseph, Advocate ᮧ᭜यथᱮ कᳱ ओर से/Respondent by : Shri M. Murali. CIT स ु नवाई कȧ तारȣख/Date of Hearing : 07.03.2022 घोषणा कȧ तारȣख/Date of Pronouncement : 08.03.2022 आदेश /O R D E R PER BENCH: These appeals by the assessee are arising out of different orders of the learned Commissioner of Income Tax (Appeals)-2, Chennai in ITA No.250/CIT(A)-2/2015-16 dated 30.11.2016 for the 2 I.T.A. Nos. 388, 1468, 1469, 1470 /Chny/2017 & 573 & 574/Chny/2020 assessment year 2013-14, ITA No. 141, 140 & 139/CIT(A)-2/2016- 17 dtaed 31.03.2017 for the assessment years 2010-11 to 2012-13 & ITA No.202/2016-17 & 103/2017-18/CIT(A)-2 dated 23.01.2020 for the assessment years 2014-15 & 2015-16. The assessments were framed by the DCIT, Non-Corporate Circle-2, Chennai u/s. 143(3) / 143(3) r.w.s. 147 of the Income Tax Act, 1961 (hereinafter ‘the Act’) for the assessment years 2010-11 to 2015-16. 2. At the outset, the ld.Counsel for the assessee Smt. Pushya Sitaraman, stated that in ITA Nos.1468, 1469 & 1470/Chny/2017 for assessment years 2010-11, 2011-12 & 2012-13, the first issue is as regards to assumption of jurisdiction by the AO for reopening of assessment u/s.147 of the Act. She stated that reopening is beyond 4 years and original assessment was completed u/s.143(3) of the Act. However, she stated that on merits, the issue in all these appeals is as regards to the disallowance of interest paid on units and this issue is covered by the decision of Hon’ble High Court of Madras in assessee’s own case for the assessment years 2008-09 & 2009-10 in Tax Case Appeal Nos.122 and 123 of 2019 vide order dated 11.02.2019. The ld. Counsel for the assessee stated that the lone issue is assessment year 2013-14 in ITA No.388/Chny/2017 3 I.T.A. Nos. 388, 1468, 1469, 1470 /Chny/2017 & 573 & 574/Chny/2020 and the issue can be considered in one year and can be followed in other years. For the sake of brevity, we will take up assessment year 2013-14 and will decide the issue. The only common issue in these appeals is as regards to disallowance of interest on units, in the nature of borrowings with the contention that interest paid was on capital. The ld.counsel for the assessee drew our attention to Ground No.2 raised by the assessee and the relevant Ground No.2 reads as under:- 2. Disallowance of Interest paid on Units The Commissioner of Income Tax (Appeals) erroneously disallowed Interest on Units (in the nature of borrowings) with the contention that the interest paid was on capital amounting to Rs.15,28,91,242/-. The decision to consider the amount of units as borrowing was taken as per the Contribution Agreement, by the Board of Trustees and Lending institutions. The nature of liability changes at the instance of the funders provided the same is acceptable by the recipient. Hence there is an error committed by the Learned Commissioner of Income Tax in agreeing with the Assessing Officer, treating Units as Capital Funds though in the Audited Balance Sheet of the relevant Assessment years, the same has been shown as borrowings. 3. Brief facts relating to this issue are that during the year under consideration amongst us, the debit towards financial cost, a new item ‘interest on units’ was included. The AO noted, during the course of assessment proceedings that this particular nomenclature of expenditure was brought in by the assessee for the first time from assessment year 2010-11 onwards. The AO further noted that 4 I.T.A. Nos. 388, 1468, 1469, 1470 /Chny/2017 & 573 & 574/Chny/2020 there was no such expenditure claimed or paid on account of interest on units in prior years. During the assessment proceedings, the AO required the assessee to furnish details of claim of this expenditure i.e., interest on units. The assessee explained that units comprises borrowed funds and contented that as per accounts of the assessee and it particularly referred to schedule ‘C’ which relates to other funds and the unit which signifies that the same is towards borrowed funds and it does not belongs to own funds. The assessee explained that actually the interest was claimed on borrowed funds but the nomenclature was given as other funds under the head ‘units’. The AO examined the records and noted that the assessee Tamilnadu Urban Development Fund came into existence in assessment year 1997-98. He also noted that as per the G.O. passed by the Government of Tamilnadu authorizing the creation of this fund, the assessee entered into a Trust Deed dated 29.11.1996 and the contribution agreement dated 18.11.1996 was entered into. The term contribution has been defined in the contribution agreement and similarly, the term contributors / beneficiaries has been defined, as the person who have made or agreed to make contribution to the trust in accordance with this contribution agreement. Consequently, the trust deed and also the 5 I.T.A. Nos. 388, 1468, 1469, 1470 /Chny/2017 & 573 & 574/Chny/2020 contribution agreement, the amount received from contributors was no doubt mentioned as a loan or a borrowing, this was actually loan as per assessee but the AO noted that interest on capital is allowable only in case of AOP (Firm) u/s.40(b)(iii) of the Act. But he noted that in the present case under consideration, the assessee is not an AOP i.e., Firm but as AOP i.e., Trust. He noted that even in the case of firms which do not comply with the provisions of section 184 of the Act, interest on capital cannot be allowed as per the provisions of section 185 of the Act on being treated as an AOP. Accordingly, he disallowed the claim made u/s.36(1)(iii) of the Act. Aggrieved assessee preferred appeal before CIT(A). The CIT(A) also confirmed the action of the AO on the same reasoning. Aggrieved, now assessee is in appeal before Tribunal. 4. Before us, the ld.counsel for the assessee first of all argued that the assessee’s Trust is a revocable trust and it is to be assessed as an AOP at maximum marginal rate as decided by ITAT in assessee’s own case for assessment years 2008-09 & 2009-10 in ITA Nos. 2316 & 2317/Mds/2016, order dated 23.03.2017. She stated that the Tribunal held that the Trust being revocable one, the income can only be taxed in the hands of the contributions and not 6 I.T.A. Nos. 388, 1468, 1469, 1470 /Chny/2017 & 573 & 574/Chny/2020 in the hands of the trustees. She stated that this order of the Tribunal is affirmed by the Hon’ble Jurisdictional High Court in Tax Case Appeal No.122 & 123 of 2019, order dated 11.02.2019, wherein questions raised before Hon’ble Madras High Court and adjudicated reads as under:- i) Whether the Tribunal was right in conceding that the Assessee Trust was a revocable one entitled to claim status under section 61 when the Trust Deed itself clearly state that as per clause 29 it was an irrevocable Trust which would come to an end only when all the contributors as a whole decide to put an end to it? ii) Whether the Tribunal was right in treating the Assessee is not a commercial in nature especially when the Assessee has submitted Form 3CB and 3CD complying with the provisions of Section 44AB which would imply that the Assessee is a commercial enterprise? iii) Whether the finding of the Tribunal is correct especially when the Assessee Trust is an indeterminate one as per Explanation 1(ii) to Section 164 read with Section 160(1)(vi) and that the liability is fashioned to the representative Assessee only especially when the name of the beneficiaries and their respective shares is not spelt out in the Trust Deed but only in the supplementary contribution agreement? iv) Whether the Tribunal was correct in granting relief to the Assessee especially when the Assessee itself has withdrawn the status claimed under section 61 by filing the return of income for the Assessment Year 2010-11 onwards and there was no change in the Trust Deed for the previous assessment year and therefore, differential treatment of status under Section 61 cannot be enjoyed by the Assessee on the income which is otherwise taxable? The ld.counsel for the assessee then took us through the findings of the Hon’ble Jurisdictional High Court wherein the Hon’ble High Court has considered Chapter V of the Act, particularly Section 60, 61, 62 & 7 I.T.A. Nos. 388, 1468, 1469, 1470 /Chny/2017 & 573 & 574/Chny/2020 164 of the Act. The Hon’ble High Court finally held that the provisions of section 62(2) clearly stands attracted in the present case and held that the shares of beneficiaries are non-determinate i.e., three companies in question viz., HDFC, ICICI and IL&FS. She referred para 9, 10 & 11 of the judgment of Hon’ble Madras High Court. In term of the above, ld.counsel stated that the issue is squarely covered in favour of the assessee on merits and even the SLP filed by the Department has been dismissed by the Hon’ble Supreme Court. 5. Contra, the ld.CIT-DR Shri M. Murali could not controvert the above arguments when the judgment of Hon’ble Madras High Court was confronted to him. He only relied on the order of CIT(A) and that of the AO. 6. We have heard rival contentions and gone through the facts and circumstances of the case. We noted that the trust is a revocable trust, whether it ought to be assessed as an AOP at maximum marginal rate or beneficiaries are to be taxed. This issue was decided by the Co-ordinate Bench of the Tribunal in assessee’s own case for assessment years 2008-09 & 2009-10 in ITA Nos.2316& 2317/Mds/2016 (cited supra), wherein the Tribunal after considering the objects of the trust decided the issue in para 10 as under:- 8 I.T.A. Nos. 388, 1468, 1469, 1470 /Chny/2017 & 573 & 574/Chny/2020 10.0 The assessee also invited our attention to Page No.6 of the paper book for the definition of investments which is re-produced hereunder: “Investments” means monies lent/to be lent by the TRUST only for Infrastructure Projects and includes monies placed by the Trust in instruments such as Government Promissory Notes or other Government Security an defined in Sec.2 of the Public Debt Act, 1944, stock or shares in any banking company or other public company, or stocks, funds, shares debenture, debenture stock, commercial papers, financial papers, short term or long - term corporate deposits, securitized debt, mortgage, bonds, obligations and securities of any description whatsoever. From the above extracts of the Paper Book, which are extracted from the Trust Deed and the contributor’s agreement, it is evident that the assessee is not carrying on any business with commercial motive. The beneficiaries of the trust are identifiable and the shares are determined by contributor’s agreement and the contributors are free to call upon the Trust to cancel any units held by them and return the value. Therefore, the trust is revocable trust and squarely covered by section 61 of Income tax act. Accordingly, we hold that Trust is a revocable Trust and the income derived by the assessee required to be taxed in the hands of the beneficiaries in accordance with the provisions of section 61 and 161(1) of income tax act. This view is supported by the decision of the Co-ordinate Bench in the case of DCIT v. India Advantage Fund–VII cited supra relied upon by the assessee. The assessee also filed evidence regarding the admission of income by the beneficiaries in Page Nos.81 to 83 from the contributors ICICI Bank, IL&FS and the HDFC. Therefore, the appeals of the assessee for the A.Ys 2008-09 and 2009-10 are allowed and the orders of the lower authorities are set-aside.” 6.1 Further, we noted that this issue travelled to Hon’ble High Court of Madras and the Hon’ble High Court in Tax Case Appeal No.122 & 123 of 2019 supra has adjudicated this issue, in the given facts of the present case and held in para 9, 10 & 11 as under:- 9. In view of the clear Scheme of the Act and the provisions quoted above, we find little force in the submission made by the learned counsel for the 9 I.T.A. Nos. 388, 1468, 1469, 1470 /Chny/2017 & 573 & 574/Chny/2020 Revenue. Section 62(2) clearly stands attracted to the present case. The funds and transferred by the beneficiaries viz., the 3 Companies to the Trust created by the Settlor viz., State of Tamil Nadu were revocable after the specified period of three years. But, besides being Settlor, also a contributor of funds to the Trust in question, since the Units were revocable after a period of 3 years, at any point of time, irrespective of the fact whether they have been actually revoked or not or contributions have been actually recalled or not, Section 62(2) stands attracted and the said provisions clearly provide that the income in question would be taxed in the hands of the transferors which has, in fact, been taxed so far and that fact has not been disputed by the learned counsel appearing for the Revenue at all. 10. The contention raised by the learned counsel appearing for the Revenue on the anvil of Section 164 of the Act falls to the ground on the bare reading of the Section itself which provides that Section 164 will be applicable only if the share of the beneficiaries is unknown or indeterminate. The facts are otherwise. Not only the 3 companies in question viz., HDFC, ICICI and IL&FS but the Government of Tamil Nadu itself contributed the funds from time to time in the said Trust Fund created in the Trust Deed. Both of them were entitled to revoke the same after a period of 3 years. The number of shares, their extent of benefits and their identity have not been found in dispute. Therefore, the question of applying Section 164 of the Act to the facts of the present case does not simply arise. 11. Therefore, we are satisfied that the Tribunal was perfectly justified in invoking Section 62(2) of the Act read with Section 61(1) of the Act which would apply only to the Revocable Transfer of the funds made for a period which is not specified and these above circumstances, it would be taxable in the hands of the Transferor/beneficiaries and not in the hands of the Trust. As a matter of fact, the findings rendered by the Tribunal are mere findings of facts and on application of relevant provisions of the Act which, in the facts of the case, does not give rise to a substantial question of law requiring our consideration under section 260A of the Act. The appeals are, thus, found devoid of merits and the same are liable to be dismissed. Accordingly, they are dismissed. No order as to costs. The connected miscellaneous petition is closed. 6.2 Even, We noted that the ld.counsel for the assessee made statement at bar that the SLP filed by the Revenue against the 10 I.T.A. Nos. 388, 1468, 1469, 1470 /Chny/2017 & 573 & 574/Chny/2020 judgment of Hon’ble Madras High Court was dismissed, which was not controverted by ld. CIT-DR. As the issue is squarely covered in favour of assessee by the judgment of Hon’ble Jurisdictional High Court for the assessment years 2008-09 & 2009-10, there is no change in facts for these assessment years, we respectfully following the same allow the claim of assessee in regard to interest paid on units and direct the AO accordingly. This issue of assessee’s appeals is allowed on merits. 7. Coming to next issue only in ITA 388/Chny/2017 i.e., disallowance of interest relatable to exempt income by invoking the provisions of section 14A of the Act read with rule 8D(2)(iii) of the Income Tax Rules, 1962 (hereinafter the ‘Rules’). For this, assessee has raised Ground No.3, which is argumentative and which need not be reproduced. 8. We have heard rival contentions on this issue and gone through facts and circumstances of the case. We noted that the assessee has claimed exempt income to the tune of Rs.2,92,790/- out of the investment made with Madurai Corporation in Unsecured redeemable non convertible tax free blonds amounting to Rs.81,83,469/-. The AO during the course of assessment proceedings made disallowance by invoking Rule 8D(2)(iii) of the Rules i.e., 0.5% of the average value of 11 I.T.A. Nos. 388, 1468, 1469, 1470 /Chny/2017 & 573 & 574/Chny/2020 investment at Rs.2,21,225/- as against ‘nil’ disallowance made by the assessee. The CIT(A) also affirmed the action of the AO. Aggrieved, assessee is in appeal before the Tribunal. 9. Now before us, the ld.counsel for the assessee only made submission that the disallowance under Rule 8D(2)(iii) may be restricted to the extent of investments / instruments giving raise to exempt income are to be considered for making disallowance. On this, ld.CIT-DR stated that for considering this plea, the matter can be referred back to the file of the AO, he will identify the investments which give raise to exempt income and accordingly recomputed the disallowance. We find the plea of both the sides reasonable and accordingly, we remand the matter back to the file of the AO, who will identify the investments giving raise to exempt income and will consider only those investments for making disallowance while computing 0.5% average value of investment for the purpose of disallowance of administrative expenses. We order accordingly. 10. Since we have adjudicated the issue on merits in ITA Nos.1468, 1469 & 1470/Chny/2019 for assessment years 2010-11, 2011-12 & 2012-13, on the jurisdictional issue we are refraining ourselves from adjudicating for the reason that the same has become academic. 12 I.T.A. Nos. 388, 1468, 1469, 1470 /Chny/2017 & 573 & 574/Chny/2020 11. In the result, the appeals filed by the assessee in ITA Nos. 1468, 1469, 1470/Chny/2017, 573 & 574/Chny/2020 are allowed and ITA No.388/Chny/2017 is allowed for statistical purposes partly. Order pronounced in the court on 8 th March, 2022 at Chennai. Sd/- Sd/- (डॉ एम एल मीना) (Dr. M.L. MEENA) लेखा सद᭭य /ACCOUNTANT MEMBER (महावीर ᳲसह ) (MAHAVIR SINGH) उपा᭟यᭃ /VICE PRESIDENT चे᳖ई/Chennai, ᳰदनांक/Dated, the 8 th March, 2022 RSR आदेश कᳱ ᮧितिलिप अᮕेिषत/Copy to: 1. अपीलाथᱮ/Appellant 2. ᮧ᭜यथᱮ/Respondent 3. आयकर आयुᲦ (अपील)/CIT(A) 4. आयकर आयुᲦ /CIT 5. िवभागीय ᮧितिनिध/DR 6. गाडᭅ फाईल/GF.