DCIT, CHENNAI V. Rane Brake Lining Ltd., CHENNAI

ITA 1527/CHNY/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4762 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 8 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 02-06-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R VIJAYARAGHAVAN
• Assessee Lawyers: S BHARATH
• Keywords: Business income; Rectification of order; Earning of tax free income; Services rendered outside India; Proportionate interest; Commercial expediency
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , A B ENCH, CHENNAI . . . , . , BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NOS.1526 TO 1528/CHNY/2014 ( / ASSESSMENT YEARS: 2008-09,2009-10, 2010-11) THE DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT II, CHENNAI. VS M/S. RANE BRAKE LINING LTD., 32, CATHEDRAL ROAD, CHENNAI 600 086. PAN: AAACR1703L ( /APPELLANT) ( /RESPONDENT) & ./ I.T.A.NOS.1593 TO 1596/CHNY/2014 ( / ASSESSMENT YEARS: 1999-2000, 2001-02, 2006-07 & 200 7-08) M/S. RANE BRAKE LININGS LTD., (NOW KNOWN AS RANE BRAKE LINING LIMITED) PLOT NO.30, INDUSTRIAL ESTATE, AMBATTUR, CHENNAI 600 058. VS THE DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT II, CHENNAI. PAN: AAACR1703L ( /APPELLANT) ( /RESPONDENT) /ASSESSEE BY : SHRI S. BHARATH, CIT /REVENUE BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE /DATE OF HEARING : 11.01.2018 !' /DATE OF PRONOUNCEMENT : 15.02.2018 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THE REVENUE HAS RAISED THREE APPEALS AGAINST THE ORDERS OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS), LA RGE TAXPAYER UNIT, CHENNAI ALL DATED 20.02.2014 IN ITA TR NO.19/13- 14/LTU(A), ITA NO.95/11-12/LTU(A) & ITA 27/12-13/L TU(A) FOR 2 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 THE ASSESSMENT YEARS 2008-09, 2009-10 & 2010-11 RES PECTIVELY PASSED U/S.143(3) OF THE ACT. 2. THE ASSESSEE HAS ALSO RAISED FOUR APPEALS AGAINS T THE ORDERS OF THE LD. COMMISSIONER OF INCOME TAX(APPEAL S), LARGE TAXPAYER UNIT, CHENNAI ALL DATED 20.02.2014 IN ITA TR NO.33/10- 11/LTU(A) PASSED U/S.250(6) R.W.S. 143(3) & 147 OF THE ACT FOR THE ASSESSMENT YEAR 1999-2000, ITA TR NO.16/10-11/L TU(A) PASSED U/S.250(6) R.WS. 143(3) & 254 OF THE ACT FOR THE ASSESSMENT YEAR 2001-02, ITA TR.NO.15/10-11/LTU(A) PASSED U/S.250(6) R.W.S. 143(3) OF THE ACT FOR THE ASSESSM ENT YEAR 2006- 07 AND ITA TR.NO.18/10-11/LTU(A) PASSED U/S.250(6) R.W.S. 143(3) OF THE ACT FOR THE ASSESSMENT YEAR 2007-08. 3. REVENUES APPEAL:- THE REVENUE HAS RAISED SEVERAL IDENTICAL GROUNDS I N ITS APPEALS FOR THE ASSESSMENT YEARS 2008-09, 2009-10 & 2010-11 AND THEY ARE BRIEFLY STATED HEREUNDER FOR ADJUDICAT ION:- (I) THE LD.CIT(A) HAS ERRED IN DELETING THE DISALLO WANCE MADE BY THE LD.AO AMOUNTING TO RS.18,14,642/-, RS.19,45,374/- & RS.26,71,000/- FOR THE ASSESSMENT YEARS 2008-09, 2009-10 & 2010-11 RESPECTIVELY INVOKING TH E 3 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 PROVISIONS OF U/S.40(A)(I) OF THE ACT TOWARDS NON-D EDUCTION OF TAX AT SOURCE ON THE PAYMENT MADE FOR EXPORT COMMISSION TO NON-RESIDENT FOR SERVICES RENDERED OU TSIDE INDIA. (II) THE LD.CIT(A) HAS ERRED IN DELETING THE DISALL OWANCE OF RS.16,70,142/- & RS.3,63,415/- FOR THE ASSESSMENT Y EAR 2008-09 & 2009-10 RESPECTIVELY U/S.40(A)(IA) OF THE ACT TOWARDS PAYMENT MADE FOR SOFTWARE LICENSES WITHOUT DEDUCTING TAX AT SOURCE (III) THE LD.CIT(A) HAS ERRED IN DELETING THE DISAL LOWANCE MADE BY THE LD.AO TOWARDS PROVISION MADE FOR FUTURE LOSS ON THE UNSETTLED FOREX DERIVATIVES AMOUNTING TO RS.8,15,000/- FOR THE ASSESSMENT YEAR 2010-11. 4. ASSESSEES APPEAL:- THE ASSESSEE HAS RAISED SEVERAL IDENTICAL GROUNDS I N ITS APPEALS FOR THE ASSESSMENT YEAR 1999-2000,2001-02,2 006-07 & 2007-08 AND THEY ARE BRIEFLY STATED HEREUNDER FOR A DJUDICATION:- I. THE LD.CIT(A) HAS ERRED IN CONFIRMING THE ORDER OF THE LD.AO WHO HAD DISALLOWED PROPORTIONATE INTEREST INC URRED FOR NON-BUSINESS PURPOSES AMOUNTING TO RS.1,38,22,8 71/- (RS.1,35,21,690 + RS.3,01,181) FOR THE ASSESSMENT Y EAR 4 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 1999-2000 AND RS.2,58,95,828/- (5999696 + 19896132) FOR THE ASSESSMENT YEAR 2001-02. II. THE LD.CIT(A) HAS ERRED IN CONFIRMING THE ORDER OF THE LD.AO WHO HAD DISALLOWED 5% OF DIVIDEND INCOME TOWARDS EXPENDITURE ATTRIBUTABLE FOR EARING EXEMPT INCOME INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT AMOUNTING TO RS.14,89,815/- & RS.43,15,240/- FOR TH E ASSESSMENT YEARS 2006-07 & 2007-08 RESPECTIVELY. REVENUES APPEAL: 5. GROUND NO. 3(I) :DISALLOWANCE OF EXPORT COMMISSION PAYMENTS MADE TO NON-RESIDENT AGENTS INVOKING SECTI ON 40(A)(IA) OF THE ACT FOR THE ASSESSMENT YEARS 2008- 09,2009-10 & 2010-11:- DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDI NGS, IT WAS OBSERVED BY THE LD.AO THAT THE ASSESSEE HAD PAI D COMMISSION TO AGENTS OUTSIDE INDIA. ON QUERY IT WAS EXPLAINED BY THE ASSESSEE THAT THE COMMISSION PAYMENTS TO NON-RE SIDENT AGENTS MADE OUTSIDE INDIA WAS TOWARDS EXPORT CONTRA CTS PROCURED ABROAD. HOWEVER THE LD.AO WAS OF THE OPINION THAT T HE ASSESSEE 5 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 HAD INCURRED EXPENSES WHICH AMOUNTS TO FEES FOR TEC HNICAL SERVICES WHEREBY PROVISIONS OF SECTION 9(1)(VII) OF THE ACT WOULD APPLY. THEREFORE THE LD.AO INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT DISALLOWED THE COMMISSION PAYM ENTS MADE OUTSIDE INDIA TO FOREIGN AGENTS FOR ALL THE ABOVE T HREE ASSESSMENT YEARS. 5.1 ON APPEAL THE LD.CIT(A) FOR ALL THE THREE ASSES SMENT YEARS MENTIONED HEREIN ABOVE, AFTER ANALYZING THE NATURE OF PAYMENTS MADE TO VARIOUS PARTIES DIRECTED THE LD.AO TO DELET E THE DISALLOWANCES MADE U/S.40(A)(IA) OF THE ACT WITH RE SPECT TO COMMISSION PAID TO FOREIGN AGENTS FOR SERVICES REND ERED OUTSIDE INDIA AND WITH RESPECT TO CERTAIN OTHER PAYMENTS SU STAINED THE ADDITION SINCE THE REQUISITE PARTICULARS WERE NOT P ROVIDED BEFORE HIM. 5.2 AT THE OUTSET, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD.CIT(A) ON THIS ISSUE BECAUSE IT HAS BEEN DECIDED BY THE HONBLE JURISDICTIONAL MADRAS HIGH COURT IN THE CAS E CIT VS. FAIZON SHOES PVT. LTD., REPORTED IN 367 ITR 0155 TH AT PAYMENT MADE TO FOREIGN AGENTS FOR SERVICES RENDERED OUTSID E INDIA, TAX NEED NOT BE DEDUCTED AT SOURCE BECAUSE WITH RESPECT TO FOREIGN 6 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 AGENTS INCOME DOES NOT ACCRUE OR ARISE IN INDIA FOR SERVICES RENDERED OUTSIDE INDIA. FOLLOWING THE RATIO LAID D OWN BY THE HONBLE JURISDICTIONAL MADRAS HIGH COURT THE LD.CIT (A) HAS RIGHTLY GRANTED RELIEF TO THE ASSESSEE WHEREVER HE COULD ARRIVE AT THE CONCLUSION THAT THE COMMISSION PAYMENTS WERE MA DE TO FOREIGN AGENTS FOR SERVICES RENDERED OUTSIDE INDIA AND IN OTHER INSTANCES, HE HAS SUSTAINED THE ADDITION BECAUSE TH E ASSESSEE WAS UNABLE TO FURNISH ANY PARTICULARS BEFORE HIM. ACCORDINGLY THE ORDERS OF THE LD.CIT(A) IS CONFIRMED FOR ALL TH E THREE ASSESSMENT YEARS 2008-09, 2009-10 & 2010-11. 6. GROUND NO.3(II) : DISALLOWANCE OF EXPENDITURE TOWAR DS SOFTWARE LICENSE FOR THE ASSESSMENT YEARS 2008-09 & 2009- 10:- DURING THE COURSE OF SCRUTINY ASSESSMENT IT WAS O BSERVED BY THE LD.AO THAT THE ASSESSEE HAD MADE PAYMENTS TO WARDS PURCHASE OF SOFTWARE LICENSE FOR BOTH THE ASSESSMEN T YEARS. FOR THE ASSESSMENT YEAR 2008-09, THE LICENSE WAS WITH R ESPECT TO PURCHASE OF 21 NOS. OF SAP LICENSES FROM M/S. RANE HOLDINGS LTD, AUTOCAD 2007 SOFTWARE LICENSE AND PURCHASE OF UP GRADATION R&D SOFTWARE FROM APANA TECHNOLOGIES, CHENNAI. SINC E THE ASSESSEE HAD NOT DEDUCTED TAX AT SOURCE TOWARDS THE PAYMENT 7 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 MADE FOR USING THE SOFTWARE, THE LD.AO INVOKED THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. 6.1 ON APPEAL FOR THE ASSESSMENT YEAR 2008-09, THE LD.CIT(A) DELETED THE DISALLOWANCE BECAUSE IN THE CASE OF SAP LICENSE, AUTOCAD AND R&D UPGRADATION SOFTWARE WERE OFF THE SHELF SOFTWARE WHICH ARE IN THE NATURE OF COPY-RIGHTED AR TICLE AND NOT A COPY-RIGHT. PAYMENT MADE TO CERTAIN OTHER SOFTWARE S PERTAINING TO RESEARCH & DEVELOPMENT, THE LD.CIT(A) DID NOT ADJUD ICATE THE ISSUE BECAUSE THE LD.AO HAD ALREADY ALLOWED THE CLA IM OF THE ASSESSEE VIDE HIS RECTIFICATION ORDER DATED 25.03.2 013 FOR THE ASSESSMENT YEAR 2008-09. THE LD.CIT(A) HAD FURTHER ALLOWED THE APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2009 -10 FOR THE SAME REASONS. 6.2 AT THE OUTSET, WE FIND MERIT IN THE ORDER OF TH E LD.CIT(A). WHEN THE SOFTWARE IS PURCHASED OFF THE SHELF FOR USAGE AS A PRODUCT, PROVISIONS OF SECTION 40(A)(IA) OF THE ACT WOULD NOT BE APPLICABLE BECAUSE IT IS NOT A PAYMENT MADE FOR ANY SERVICE RENDERED. THEREFORE THE LD.CIT(A) HAS RIGHTLY DECID ED THE ISSUE IN FAVOUR OF THE ASSESSEE. THEREFORE IN THIS SITUATION WE DO NOT FIND IT 8 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 NECESSARY TO INTERFERE WITH THE ORDERS OF THE LD.CI T(A) FOR BOTH THE ASSESSMENT YEARS 2008-09 & 2009-10 ON THIS ISSUE. 7. GROUND NO. 3(III) : DISALLOWANCE OF THE PROVISION M ADE FOR FUTURE LOSS ON THE UNSETTLED FOREX DERIVATIVES AMOUNTING TO RS.8,15,000/- FOR THE ASSESSMENT YEAR 2010-11 DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDI NGS IT WAS OBSERVED BY THE LD.AO THAT THE ASSESSEE HAD CLA IMED LOSS DUE TO EXCHANGE FLUCTUATION AMOUNTING TO RS.8,15,00 0/- ON THE UNSETTLED FOREX DERIVATIVES. ON QUERY IT WAS EXPLAI NED BY THE ASSESSEE THAT TO MITIGATE THE RISK OF LOSS DUE TO F OREIGN EXCHANGE TRANSACTION THE COMPANY HAS TAKEN FORWARD COVER WIT H RESPECT TO ITS DEBTORS AND CREDITORS. IT WAS FURTHER EXPLAINED THAT ON VALUING THE DEBTORS AND CREDITORS AS ON 31.03.2010, WITH RE SPECT TO THE FOREIGN EXCHANGE TRANSACTIONS, THE LOSS WAS ARRIVED AT RS.8,15,000/-. HOWEVER THE LD.AO TAKING CUE FROM SE CTION 43(5)(D) OF THE ACT ARRIVED AT THE CONCLUSION THAT THE DERIVATIVE TRANSACTION WHICH IS NOT SETTLED BY ACTUAL DELIVERY HAS TO BE TREATED AS SPECULATIVE TRANSACTION AND THEREFORE NO T ALLOWABLE AS DEDUCTION. THE LD.AO WAS FURTHER OF THE VIEW THAT T HE LOSS DEBITED TO THE P&L ACCOUNT BY RESTATING THEIR RECEIVABLES / PAYABLES WITH THE PREVAILING EXCHANGE RATE AS ON 31.03.2010 IS ON LY A PROVISION 9 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 CREATED FOR UNASCERTAINED LIABILITY AND THEREFORE N OT ALLOWABLE AS DEDUCTION UNDER THE INCOME TAX ACT. 7.1 ON APPEAL THE LD.CIT(A) GRANTED RELIEF TO THE A SSESSEE BY OBSERVING AS FOLLOWS:- I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE LD.AR. AS PER THE DECISION OF HON'BLE SUPREME C OURT IN THE CASE OF WOODWARD GOVERNORS INDIA P LTD, 312 ITR 254 (2009) (SC) AND SEVERAL OTHER CASES, THE FOREIGN EXCHANGE FLUCTUATION LOSS WAS ALLOWED AS BUSINESS LOSS. IT WAS ALSO RECOGNIZED THE FORWARD C ONTRACTS AS HEDGING TOOLS TO PROTECT THE INTEREST OF THE BUSINESS FROM THE VOLATILITY OF THE FOREIGN CURRENCY. THE PRECONDITION FOR ALLOWING SUC H LOSSES ARE THE FOLLOWANCE OF GUIDELINES OF RBI AND FEMA AND THE FO RWARD CONTRACTS (FCS) SHOULD BE WITHIN THE VALUE OF THE INVOICES. T HE FOREIGN EXCHANGE LOSS / GAIN AT THE END OF THE CLOSURE OF THE ACCOUN TS IE., 31 ST MARCH WAS ALSO PERMITTED AS PER THE ACCOUNTING STANDARDS. HOW EVER, AS PER THE DECISION IN THE CASE OF LONDON STAR DIAMOND COMPANY (I) P.LTD IN ITA NO.6169/M/2012 DATED 11.10.2013 A.Y.09-10, THE ITAT MUMBAI HAS HELD THAT THE APPELLANT SHOULD FURNISH THE SATISFACTORY EXPLANATION TO THE AO IF THE FORWARD CONTRACTS WERE CLOSED PREMATURELY IF TH E LOSS NEEDS TO BE ALLOWED. THE LOSS INCURRED BY THE APPELLANT APPEARS TO BE THE LOSS DUE TO THE CLOSURE OF ACCOUNTS AS ON 31 ST MARCH, IN WHICH CASE THE LOSS INCURRED ON MARK TO MARKET BASIS AS ON 31 ST MARCH NEEDS TO BE ALLOWED. I DIRECT THE AO ACCORDINGLY. THE GROUND IS ALLOWED. 7.2 ON ANALYZING THE FACTS OF THE ISSUE, WE FIND ME RIT IN THE ORDER OF THE LD.CIT(A). THE ASSESSEE HAS ARRIVED AT THE VALUE OF ITS RECEIVABLES AND PAYABLES AS ON THE END OF THE R ELEVANT PREVIOUS YEAR WITH RESPECT TO FOREIGN EXCHANGE TRAN SACTIONS RESULTING FROM TRADING ACTIVITY AND SUCH LOSS DUE T O THE FLUCTUATION IN FOREIGN CURRENCY FALLS IN THE REVENUE FIELD. MOR EOVER, AS PER THE 10 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 ACCOUNTING STANDARDS SUCH LOSS HAS TO BE RECOGNIZED IN THE END OF THE RELEVANT PREVIOUS YEAR IN WHICH SUCH LOSS HA S INCURRED. THE LD.CIT(A) HAS RIGHTLY RELYING ON THE DECISION OF TH E HONBLE APEX COURT AND THE OTHER DECISIONS CITED IN HIS ORDER AN D ALSO TAKING NOTE OF THE ACCOUNTING STANDARDS HAS ALLOWED THE AP PEAL OF THE ASSESSEE. IN THIS SITUATION, WE DO NOT FIND IT NECE SSARY TO INTERFERE IN HIS ORDER. ASSESSEES APPEAL 8. GROUND NO.4(I) : DISALLOWANCE OF PROPORTIONATE I NTEREST INCURRED FOR NON-BUSINESS PURPOSES AMOUNTING TO RS.1,38,22,871/- (RS.1,35,21,690 + RS.3,01,181) FOR THE ASSESSMENT YEAR 1999-2000 AND RS.2,58,95,828/- FOR THE ASSESSMENT YEAR 2001-02:- IN BOTH THE ABOVE MENTIONED RELEVANT ASSESSMENT Y EARS, IT WAS OBSERVED BY THELD.AO THAT THE ASSESSEE HAD MADE INVESTMENT IN SISTER CONCERNS FROM ITS INTEREST BEA RING FUNDS. THEREFORE THE LD.AO RELYING ON THE DECISION OF THE TRIBUNAL DISALLOWED THE INTEREST ATTRIBUTABLE WITH RESPECT T O SUCH INVESTMENT AND THEREBY MADE ADDITION FOR THE ASSESSMENT YEAR 2 001-02 AMOUNTING TO RS.2,58,95,828/- (INTEREST OF RS.59,99 ,696/- TOWARDS CURRENT YEAR INVESTMENT IN SHARES AND INTEREST OF R S.1,98,96,132/- 11 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 TOWARDS INVESTMENT IN SHARES MADE IN EARLIER YEARS) . SIMILARLY ADDITIONS WERE MADE FOR THE ASSESSMENT YEAR 1999-20 00 FOR RS.1,38,22,871/-. 8.1 ON APPEAL THE LD.CIT(A) UPHELD THE ORDER OF THE LD.AO FOR THE ASSESSMENT YEAR 1999-2000 BY OBSERVING AS FOLLO WS: 6.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND. THE SUBMISSIONS OF THE ID.AR. I HAVE ALSO GONE THROUGH THE DECISIONS RELIED ON BY THE ID.AR AND AO. THE AO HAS OBSERVED THAT TH E LOANS WERE ADVANCED FROM O.D. ALC OF ICICI BANK. THE APPELLANT HAS ARGUED THAT IT HAS SUFFICIENT OWN FUNDS AND THE AMOUNTS ADVANCED W ERE FROM INTERNAL ACCRUALS. IT HAS SUBMITTED THAT ALL THE OWN FUNDS A ND THE BORROWED FUNDS WERE ALSO MINGLED IN COMMON ACCOUNT. THEREFORE, THE ID.AR HAS ARGUED THAT THE AO IS NOT CORRECT IN STATING THAT THE LOAN S ADVANCED TO SISTER CONCERNS WERE ONLY FROM O.D. ALC AND THE CONSEQUENT DISALLOWANCE OF PROPORTIONATE INTEREST IS PROTESTED. WITH REGARD TO THE SUBJECT OF DISALLOWANCE OF DEEMED INTEREST, TWO THINGS NEED TO BE SEEN (I) WHETHER THE BORROWED FUNDS WERE USED FOR THE BU SINESS PURPOSE FOR WHICH THEY WERE BORROWED AND ENTIRE INTEREST DEBITE D IS ONLY FOR THE BUSINESS ACTIVITY OF THE ASSESSEE. [ CIT V. CALCUTT A AGENCY LTD, 19 ITR 191 (SC) ] (II) WHETHER THE LOANS ADVANCED TO SISTER CONCERNS ARE OUT OF COMMERCIAL EXPEDIENCY [ S.A. BUILDERS LTD V. CIT, 288 ITR 1 (S C) ], 6.2.1 IN THE INSTANT CASE, IT IS MADE VERY CLEAR BY THE AO THAT THE LOANS ADVANCED TO THE SISTER CONCERNS HAVE A DIRECT NEXUS WITH THEIR 0.0. FUNDS BORROWED FROM THE ICICI BANK. THEREFORE, THE INTERE ST BURDEN DIRECTLY FELL ON THE APPELLANT AND THE ENTIRE INTEREST DEBIT ED IN ITS ACCOUNT WAS NOT MEANT FOR THE BUSINESS ACTIVITY OF THE APPELLANT. T HE APPELLANT ALSO SUBMITTED IN ITS WRITTEN SUBMISSIONS DATED 15.3.201 2 AS UNDER: 'PARA 3.2...... THE LOANS BORROWED FOR THE PURPOSE OF BUSINESS WERE CREDITED TO THE COMMON ACCOUNT WHERE BOTH BORROWINGS AS WELL AS PROFITS AND OTHER NON I NTEREST BEARING FUNDS WHICH WERE MINGLED TOGETHER. IT CANNO T THEREFORE BE SAID WITH CERTAINTY THAT THE INVESTMEN TS WERE 12 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 MADE ONLY OUT OF BORROWINGS AND NOT OUT OF PROFITS EMBEDDED IN THE ACCOUNT.' IT GOES WITHOUT SAYING THAT THE ADVANCES TO THE SIS TER CONCERNS HAVE GONE FROM A COMMON FUND WHICH INCLUDES INTEREST FREE OWN FUNDS AND INTEREST BEARING BORROWED FUNDS. EVEN THOUGH THE APPELLANT H AS CONTENDED THAT LINKING UP OF O.D. FUNDS TO DIVERSION OF FUNDS TO S ISTER CONCERNS IS NOT PROPER, BUT AT THE SAME TIME IT COULD NOT ESTABLISH WITH CERTAINTY AND COGENT EVIDENCE THAT ONLY THE INTEREST FREE OWN FUN DS HAVE-BEEN DIVERTED TO SISTER CONCERNS. FURTHER, THE ONUS IS ON THE APP ELLANT TO PROVE THAT ALL THE EXPENSES, INCLUDING INTEREST, DEBITED IN THE P& L ALE ARE MEANT FOR THE BUSINESS OF THE APPELLANT. IN THE INSTANT CASE, THE APPELLANT HAS FAILED TO PROVE THAT THE ENTIRE EXPENDITURE OF INTEREST DEBIT ED IN P&L ALC WERE FOR THE LOANS BORROWED AND USED FOR ITS OWN BUSINESS. I N VIEW OF THE ABOVE DISCUSSION, THE APPELLANT HAS FAILED THE FIRST TEST THAT THE ENTIRE INTEREST EXPENDITURE DEBITED IN ITS ACCOUNT WAS ONLY RELATED TO EARNING OF ITS BUSINESS INCOME. 6.2.2 WITH REGARD TO OTHER TEST WHETHER FUNDS DIVER TED TO SISTER CONCERNS WAS OUT OF COMMERCIAL EXPEDIENCY OR NOT, NO EVIDENC E WAS FILED EITHER BEFORE THE AO OR BEFORE ME TO SHOW THAT THE FUNDS G IVEN TO THE SISTER CONCERNS WERE OUT OF NECESSITY OF THE APPELLANT'S B USINESS. THERE IS NO GAIN IN ANY WAY TO THE APPELLANT OUT OF THE FUNDS D IVERTED TO THE SISTER CONCERNS. NO EVIDENCE OF WHATSOEVER WAS FILED BEFOR E ME TO SHOW THAT THE SISTER CONCERNS WERE SICK OR IN DIRE NEED OF MONEY AND A REVIVAL IS NEEDED TO HELP RUN THE APPELLANT BUSINESS SMOOTHLY. THERE WAS NO EVIDENCE FILED BEFORE ME THAT THE SISTER CONCERN DO NOT HAVE INDEPENDENT SOURCES OF FUNDS TO RUN THEIR BUSINESS. SINCE THEY ALSO BELONG TO RANE GROUP OF COMPANIES AND HAVING REPUTATION THEY THEMS ELVES COULD HAVE APPROACHED THE BANKS AND OBTAIN LOANS ON THEIR OWN. THE ID.AR HAS NOT PRODUCED ANY OF SUCH EVIDENCES EXCEPT STATING AS UN DER IN ITS WRITTEN SUBMISSIONS. 3.1 ... OUT OF THE RETAINED EARNINGS, THE APPELLAN T MADE STRATEGIC INVESTMENTS IN GROUP COMPANIES VIZ., RANE(MADRAS) LTD, RANE LUK CLUTCH LTD, JMA RANGE MARKETING LTD. THE GROUP COMPANIES ARE PART OF 'RAN E' GROUP WHICH DEALS IN THE MANUFACTURE OF AUTOMOBILE ANCILLARIES. THUS, THE INVESTMENT IN THE GROUP WAS IN THE COURSE OF BUSINESS ACTIVITY AS THE INVESTEE COMPANI ES ARE ALSO IN THE AUTO ANCILLARY INDUSTRY.' FROM THE ABOVE, IT IS CLEAR THAT THERE IS NO COMMER CIAL EXPEDIENCY TO DIVERT THE INTEREST BEARING OR ANY LOANS TO THE SIS TER CONCERNS AT ITS OWN 13 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 COST. THE SIMPLE RHETORIC, THAT THE 'STRATEGIC INVE STMENTS' WERE MADE IN THE GROUP COMPANIES SINCE THEY ARE ALSO INTO AUTO A NCILLARY INDUSTRY, IS NOT A SOUND ARGUMENT. I ALSO AGREE WITH THE ARGUMEN T OF THE AO THAT HAD THE FUNDS WERE NOT DIVERTED TO SISTER CONCERNS, THE APPELLANT COMPANY WOULD NOT HAVE APPROACHED THE BANKS FOR LOANS OR HA VE GONE FOR A LESSER BORROWINGS AND THE INTEREST BURDEN WOULD HAVE BEEN LESS ON THE APPELLANT. IT IS ALSO PERTINENT TO NOTE THE OBSERVA TION OF THE AO THAT THE FREE FUNDS WERE LOCKED UP IN OTHER ASSETS LIKE FIXE D ASSETS, CURRENT ASSETS ETC. 6.2.3 IN VIEW OF THE ABOVE DISCUSSION, I AM OF THE OPINION THAT THE FUNDS WERE NOT GIVEN OUT OF ANY COMMERCIAL EXPEDIENCY AND THE DISALLOWANCE OF DEEMED INTEREST @ 12% MADE BY THE AO IS IN ORDER . THE GROUND IS DISMISSED. FOR THE ASSESSMENT YEAR 2001-02 ALSO, THE LD.CIT(A) FOLLOWING HIS ORDER FOR THE ASSESSMENT YEAR 1999-2000 UPHELD THE VIEW OF THE LD.AO. 8.2 AT THE OUTSET WE DO NOT FIND ANY INFIRMITY IN T HE ORDERS OF THE LD.REVENUE AUTHORITIES ON THIS ISSUE. IT IS EVI DENT FROM THE FACTS OF THE CASE THAT THE ASSESSEE HAS INVESTED IT S INTEREST BEARING FUNDS IN EQUITY SHARES EARNING DIVIDEND INC OME WHICH IS EXEMPT FROM TAX. MOREOVER NOTHING IS BROUGHT OUT B EFORE US TO ESTABLISH THAT THESE INVESTMENTS ARE MADE FOR STRAT EGY PURPOSES OR DUE TO COMMERCIAL EXIGENCIES. OBVIOUSLY EXPENSES INCURRED TOWARDS INVESTMENT MADE FOR EARNING EXEMPT INCOME C ANNOT BE CHARGED TO THE BUSINESS OPERATIONS OF THE ASSESSEE, BECAUSE SUCH EXPENDITURE ARE NOT RELATED TO THE BUSINESS OF THE ASSESSEE. 14 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 THE ASSESSEE AS WELL AS ITS SISTER CONCERNS ARE DIF FERENT ENTITIES AS PER THE PROVISIONS OF THE ACT AND ONLY THE EXPEN SES THAT ARE INCURRED BY THE ASSESSEE TOWARDS ITS RESPECTIVE BUS INESS ACTIVITIES WILL BE ALLOWABLE AS DEDUCTION. THEREFORE WE ARE OF THE CONSIDERED VIEW THAT THE DECISION OF THE LD.REVENUE AUTHORITIE S ON THIS ISSUE IS APPROPRIATE. HENCE WE DO NOT FIND IT NECESSARY T O INTERFERE IN THEIR ORDERS ON THIS ISSUE. 9. GROUND NO. 4(II) : DISALLOWANCE U/S.14A OF THE ACT FOR RS.14,89,815/- & RS.43,15,240/- FOR THE ASSESSMENT YEARS 2006-07 & 2007-08 RESPECTIVELY:- DURING THE COURSE OF SCRUTINY ASSESSMENT FOR THE ASSESSMENT YEAR 2006-07, IT WAS OBSERVED BY THE LD. AO THAT THE ASSESSEE HAS UTILIZED ITS BORROWED FUNDS TOWARDS AD VANCING LOAN TO SUBSIDY COMPANY M/S. RANE DYE CAST LIMITED AMOUN TING TO RS.1,12,45,000/- AND HAS ALSO PURCHASED 28,60,000 S HARES OF M/S. RANE DYE CAST LIMITED FOR RS.5,84,87,000/-. TH US THE ASSESSEE HAD DIVERTED RS.6,97,32,000/- FOR NON-BUSI NESS PURPOSES. WITH RESPECT TO THE AMOUNT OF INTEREST BE ARING FUNDS ADVANCED TO M/S.RANE DYE CAST LIMITED FOR RS.1,12,4 5,000/- IN THE ASSESSMENT YEAR 2006-07, THE LD.AO DISALLOWED T HE AMOUNT OF RS.31,86,608/- BEING THE AMOUNT OF INTEREST ATTR IBUTABLE TOWARDS 15 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 THE SAME BECAUSE IT WAS NOT INCURRED FOR THE BUSINE SS OF THE ASSESSEE. 9.1 ON APPEAL THE LD.CIT(A) CONFIRMED THE ORDER OF THE LD.AO BY OBSERVING AS UNDER: 5.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND THE SUBMISSIONS OF THE LD.AR. ON SIMILAR ISSUE WHICH CAME UP FOR CO NSIDERATION BEFORE ME FOR A.YS 99-2000 AND 2001-02 IN APPELLANTS OWN CASE, WHEREIN AFTER DETAILED DISCUSSION, I OPINED THAT THE FUNDS WERE N OT GIVEN OUT OF ANY COMMERCIAL EXPEDIENCY AND THE DISALLOWANCE OF DEEME D INTEREST DISALLOWANCE MADE BY THE AO WAS UPHELD VIDE MY ORDE RS OF EVEN DATED. FOLLOWING THE SAME, THE GROUND IS DISMISSED FOR THIS YEAR ALSO. 9.2 WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF TH E LD.CIT(A) ON THIS ISSUE BECAUSE WE HAVE UPHELD THE ORDER OF THE LD.REVENUE AUTHORITIES FOR THE EARLIER ASSESSMENT YEARS HEREIN ABOVE ON THE VERY SAME ISSUE IN PARA 8.2. 9.3 WITH RESPECT TO THE INVESTMENT ON SHARES IN M/S . RANE DYE CAST LIMITED FOR RS.5,84,87,000/- DURING THE ASSESS MENT YEAR 2006-07 BY THE ASSESSEE, IT WAS OBSERVED BY THE LD. AO THAT THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS.2,97,96,5 10/-. THE LD.AO INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT DISALLOWED 5% OF THE SAME WHICH WORKS TO RS.14,89,8 15/-. ON 16 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 APPEAL THE LD.CIT(A) CONFIRMED THE ORDER OF THE LD. AO BY OBSERVING AS FOLLOWS: 7.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CA SE AND THE SUBMISSIONS OF THE ID.AR. SIMILAR ISSUE WAS DECIDED BY ME IN AP PELLANT'S OWN CASE FOR A.Y.2002-03 WHEREIN THE DISALLOWANCE MADE BY THE AO OF 2% WAS CONFIRMED, KEEPING IN VIEW THE FACTS AND CIRCUMSTAN CES OF THE CASE FOR THAT YEAR. FOR THIS ASSESSMENT YEAR 2006-07, THE AO HAS DEEMED IT FIT TO DISALLOW 5% OF THE GROSS DIVIDEND INCOME AS EXPENDI TURE RELATABLE TO EXEMPT INCOME. SINCE THE ITAT, CHENNAI IN THE CASE OF CELEBRITY FASHIONS IN ITA NO.1318 AND 1319/MDS/2011 FOR A.YS 2006-07 & 2007- 08 HAS FOUND 5% OF THE GROSS DIVIDEND RECEIVED AS R EASONABLE. RESPECTFULLY FOLLOWING THE ABOVE DECISION, I CONFIR M THE DISALLOWANCE MADE BY THE AO. IN VIEW OF THIS, THE OTHER POINTS R AISED ON THIS ISSUE BY THE APPELLANT DEEMED TO HAVE BEEN ANSWERED. THE GRO UND IS DISMISSED. 9.4 ON THE SIMILAR ISSUE HONBLE JURISDICTIONAL HIG H COURT IN THE CASE M/S. SIMPSON & CO. LTD VS. DCIT IN TAX CAS E (APPEAL) NO.2621 OF 2006 DATED 15.10.2012 HAS HELD THAT 2% O F DIVIDEND INCOME MAY BE DISALLOWED FOR THE PURPOSE OF COMPLIA NCE U/S.14A OF THE ACT WHICH WAS FOLLOWED BY THE TRIBUNAL IN TH E CASE DCIT VS. M/S. DATA SOFTWARE RESEARCH COMPANY (P) LTD IN ITA NOS.1837 & 1838/MDS/2014 VIDE ORDER DATED 17.07.2015 AT PARA N O.17. THEREFORE FOLLOWING THE DECISION OF THE HONBLE JUR ISDICTIONAL MADRAS HIGH COURT AND THE DECISION OF THE CHENNAI B ENCH OF THE TRIBUNAL SUPRA, WE HEREBY DIRECT THE LD.AO TO DISAL LOW 2% OF THE DIVIDEND INCOME WHICH WORKS OUT TO RS.5,95,930/-. 17 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 9.5 WITH RESPECT TO THE DISALLOWANCE U/S.14A OF THE ACT FOR THE ASSESSMENT YEAR 2007-08 THE LD.AO HAS DISALLOWED 5% OF THE DIVIDEND INCOME INVOKING SECTION 14A OF THE ACT. ON THE IDENTICAL ISSUE WITH RESPECT TO THE OTHER APPEAL OF THE ASSES SEE DISCUSSED HEREIN ABOVE WE HAVE HELD THAT 2% OF DIVIDEND INCOM E MAY BE DISALLOWED FOLLOWING THE DECISION OF THE HONBLE JU RISDICTIONAL HONBLE MADRAS HIGH COURT IN THE CASE M/S. SIMPSON & CO. LTD., AND THE DECISION OF THE CHENNAI BENCH OF THE TRIBUN AL CITED SUPRA. THEREFORE FOR THE ASSESSMENT YEAR 2007-08 ALSO THE SAME DECISION HOLDS GOOD BECAUSE RULE 8D OF THE RULES IS NOT APPLICABLE FOR THE RELEVANT ASSESSMENT YEARS. 10. IN THE RESULT THE REVENUES APPEAL IN ITA NOS.1 526, 1527 & 1528 OF 2014 ARE DISMISSED AND THE ASSESSEES APP EAL IN ITA NOS. 1593 & 1594 OF 2014 ARE DISMISSED AND IN ITA N OS. 1595 & 1596 OF 2014 ARE PARTLY ALLOWED. ORDER PRONOUNCED ON THE 15 TH FEBRUARY, 2018 AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( . ) (A. MOHAN ALANKAMONY) / ACCOUNTANT MEMBER #$ /CHENNAI, %& /DATED 15 TH FEBRUARY, 2018 18 ITA NO.1526 TO 1528, 1593 TO 1596/CHNY/2014 RSR & () *) /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. - ( )/CIT(A) 4. - /CIT 5. )./ 0 /DR 6. /1 /GF