DCIT, CHENNAI V. Carburettors Ltd., CHENNAI

ITA 1641/CHNY/2015

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 4037 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 17-07-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 17-07-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR B NISCHAL
• Assessee Lawyers: S SRIDHAR
• Keywords: Reopening of assessment; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A; 148

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , B BENCH, CHENNAI . , . , BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ I.T.A.NO.1641/CHNY/2015 ( / ASSESSMENT YEAR: 2005-06) THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(2), CHENNAI 34. VS M/S. CARBURETTORS LTD., RAHEJA TOWERS, 7 TH FLOOR, SIGMA WING, NO.177, ANNA SALAI, CHENNAI 600 002. PAN: AAACC1299E ( /APPELLANT) ( /RESPONDENT) & ./ I.T.A.NO.1517/CHNY/2015 ( / ASSESSMENT YEAR: 2005-06) M/S. CARBURETTORS LTD., RAHEJA TOWERS, 7 TH FLOOR, SIGMA WING, NO.177, ANNA SALAI, CHENNAI 600 002. VS THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(2), CHENNAI 34. PAN: AAACC1299E ( /APPELLANT) ( /RESPONDENT) /REVENUE BY : DR.B. NISCHAL, JCIT /ASSESSEE BY : SHRI S. SRIDHAR, ADVOCATE /DATE OF HEARING : 05.06.2018 /DATE OF PRONOUNCEMENT : 07.08.2018 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THE APPEALS BY THE REVENUE & ASSESSEE ARE DIRECTED AGAINST THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME 2 ITA NO.1641 & 1517/CHNY /2015 TAX (APPEALS)-1, CHENNAI DATED 27.03.2015 IN ITA NO.425/07- 08/A-III FOR THE ASSESSMENT YEAR 2005-06 PASSED U/S.250(6) R.W.S. 143(3) R.W.S. 147 OF THE ACT. 2. REVENUES APPEAL:- THE REVENUE HAS RAISED SEVERAL GROUNDS IN ITS APPEAL HOWEVER THE CRUXES OF THE ISSUE ARE THAT (I) THE LD.CIT(A) HAS ERRED IN DIRECTING THE LD.AO TO TREAT THE ACTIVITY OF MAKING INVESTMENTS FROM BORROWED FUNDS AS BUSINESS OF THE ASSESSEE AND CONSEQUENTLY ALLOW THE INTEREST EXPENSES INCURRED ON THE BORROWINGS AS BUSINESS EXPENDITURE. (II) THE LD.CIT(A) HAS ERRED IN DIRECTING THE LD.AO TO DISALLOW 5% OF THE GROSS DIVIDEND INCOME OF RS.1,29,94,020/- AS REASONABLE DISALLOWANCE U/S.14A OF THE ACT AS AGAINST THE DISALLOWANCE MADE BY THE LD.AO AMOUNTING TO RS.10,38,820/-. 3. ASSESSEES APPEAL:- THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN ITS APPEAL HOWEVER THE CRUXES OF THE ISSUES ARE THAT:- 3 ITA NO.1641 & 1517/CHNY /2015 (I) THE LD.CIT(A) HAS ERRED IN CONFIRMING THE REOPENING OF ASSESSMENT U/S.147 & 148 OF THE ACT BY THE LD.AO. (II) THE LD.CIT(A) HAS ERRED IN PARTLY SUSTAINING THE DISALLOWANCE MADE BY THE LD.AO BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING CARBURETORS FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2005-06 ON 28.10.2015 DECLARING LOSS OF RS.76,58,371/-. INITIALLY THE RETURN WAS PROCESSED U/S.143(1) OF THE ACT ON 11.10.2006 AND SUBSEQUENTLY NOTICE U/S.148 OF THE ACT WAS ISSUED ON 05.02.2007. FINALLY ASSESSMENT ORDER WAS PASSED U/S.143(3) R.W.S. 147 OF THE ACT ON 24.12.2007 WHEREIN THE LD.AO MADE SEVERAL ADDITIONS. REVENUES APPEAL:- 5. GROUND NO.2(I): DISALLOWANCE OF INTEREST EXPENDITURE OF RS.65,14,515/-:- DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE LD.AO THAT THE ASSESSEE COMPANY HAD OBTAINED SECURED LOANS FROM WHICH IT HAD INVESTED IN THE SHARES OF OTHER CONCERNS INCLUDING THE ASSESSEES COMPANY SUBSIDIARIES. THE 4 ITA NO.1641 & 1517/CHNY /2015 INTEREST EXPENDITURE OF RS.65,14,515/- ARISING OUT OF THOSE SECURED LOAN WAS CLAIMED BY THE ASSESSEE AS BUSINESS EXPENDITURE. HOWEVER THE LD.AO WAS OF THE VIEW THAT THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE COMPANY SHOULD BE CAPITALIZED BECAUSE THE AMOUNT BORROWED BY THE ASSESSEE COMPANY WAS UTILIZED FOR MAKING INVESTMENTS AND THEREFORE IT CANNOT BE TREATED AS REVENUE BUSINESS EXPENDITURE. ON APPEAL THE LD.CIT(A) CONSIDERING THE ACTIVITY OF MAKING INVESTMENT AS THE BUSINESS OF THE ASSESSEE COMPANY, ALLOWED DEDUCTION, TOWARDS THE INTEREST EXPENDITURE OF RS.65,14,515/-. 5.1 BEFORE US THE LD.DR ARGUED REITERATING THE CASE LAWS RELIED BY THE LD.AO AND PLEADED THAT THE INTEREST EXPENSE INCURRED BY THE ASSESSEE SHOULD BE TREATED AS CAPITAL EXPENDITURE AND ADDED TO THE COST OF THE INVESTMENT MADE BY THE ASSESSEE BECAUSE THE SAME IS ATTRIBUTABLE TO THE INVESTMENT. THE LD.AR ON THE OTHER HAND REQUESTED FOR REMITTING BACK THE MATTER TO THE FILE OF LD.AO TO VERIFY THE NATURE OF INTEREST EXPENSE INCURRED BY THE ASSESSEE I.E., WHETHER THE INTEREST EXPENDITURE WAS INCURRED FOR MAKING INVESTMENT OR FOR THE PURPOSE OF THE OTHER BUSINESS ACTIVITIES OF THE ASSESSEE. 5 ITA NO.1641 & 1517/CHNY /2015 5.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE MATERIALS ON RECORD. AT THE OUTSET WE FIND MERIT IN THE ORDER OF THE LD.AO. WHEN INVESTMENTS ARE MADE FROM BORROWED FUNDS, THE INTEREST ATTRIBUTABLE TOWARDS SUCH BORROWED FUNDS HAS TO BE NECESSARILY TREATED AS CAPITAL EXPENDITURE INCURRED FOR THE PURPOSE OF MAKING INVESTMENT AND CANNOT BE TREATED AS REVENUE EXPENDITURE. THE CASE LAWS RELIED BY THE LD.AO SUPPORTS THE VIEW OF THE LD.AO. HOWEVER SINCE THE LD.AR HAS REQUESTED FOR VERIFYING THE UTILIZATION OF THE BORROWED FUNDS I.E., WHETHER THE BORROWED FUNDS WERE UTILIZED FOR MAKING INVESTMENTS OR FOR OTHER BUSINESS PURPOSES OF THE ASSESSEE WHICH IS IN THE REVENUE FIELD, IN THE INTEREST OF JUSTICE, WE HEREBY REMIT BACK THE MATTER TO THE FILE OF LD.AO FOR SUCH VERIFICATION AND THEREAFTER TO PASS APPROPRIATE SPEAKING ORDER IN ACCORDANCE WITH LAW AND MERIT AND BASED ON OUR OBSERVATIONS MADE HEREIN ABOVE. 6. GROUND NO.2(II): DISALLOWANCE OF 5% OF THE GROSS DIVIDEND INCOME OF RS.1,29,94,020/- AS REASONABLE DISALLOWANCE U/S.14A OF THE ACT:- DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE LD.AO THAT THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS.1,29,94,020/- FROM INDIAN COMPANIES WHICH IS 6 ITA NO.1641 & 1517/CHNY /2015 EXEMPT FROM TAX U/S.10(34) OF THE ACT. SINCE THE ASSESSEE WAS NOT HAVING ANY BUSINESS ACTIVITY DURING THE RELEVANT ASSESSMENT YEAR, THE LD.AO DISALLOWED 50% OF THE ADMINISTRATIVE EXPENSE INCURRED BY THE ASSESSEE WHICH WORKS OUT TO RS.10,38,820/-. ON APPEAL THE LD.CIT(A) RELYING IN THE DECISION OF THE CHENNAI BENCHES OF THE TRIBUNAL IN THE CASE CELEBRITY FASHIONS, ITA NO.1318 & 1319/MDS/2011 FOR THE ASSESSMENT YEAR 2006-07 & 2007-08 DATED 30.04.2012 ESTIMATED THE DISALLOWANCE AT 5% OF THE DIVIDEND INCOME EARNED BY THE ASSESSEE WHICH WORKS OUT TO RS.6,49,701/-, AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL BEFORE US. 6.1 AT THE OUTSET WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF THE LD.CIT(A) ON THIS ISSUE, BECAUSE THE LD.CIT(A) HAS ONLY FOLLOWED THE RATIO LAID DOWN BY THE CHENNAI BENCH OF THE TRIBUNAL CITED SUPRA. MOREOVER RULE 8D OF THE RULES HAVE COME INTO EFFECT ONLY FROM 24-03-2008 IE., FROM ASSESSMENT YEAR 2008- 09. IT IS ORDERED ACCORDINGLY. ASSESSEES APPEAL: 7. GROUND NO.3(I): REOPENING OF ASSESSMENT U/S.147 & 148 OF THE ACT:- 7 ITA NO.1641 & 1517/CHNY /2015 THE LD.AR DID NOT SERIOUSLY PRESS THIS GROUND RAISED BY THE ASSESSEE. ACCORDINGLY THE GROUND RAISED BY THE ASSESSEE IS DISPOSED OFF AS NOT PRESSED. 8. GROUND NO.3(I): DISALLOWANCE U/S.14A OF THE ACT:- SINCE WE HAVE CONFIRMED THE ORDER OF THE LD.CIT(A) ON THIS ISSUE, THIS GROUND RAISED BY THE ASSESSEE DOES NOT SURVIVE. 9. IN THE RESULT APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL OF THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON THE 07 TH AUGUST, 2018 AT CHENNAI. SD/- SD/- ( . ) ( . ) ( DUVVURU RL REDDY ) ( A. MOHAN ALANKAMONY ) /JUDICIAL MEMBER / ACCOUNTANT MEMBER /CHENNAI, /DATED 07 TH AUGUST, 2018 RSR /COPY TO: 1. / ASSESSEE 2. /REVENUE 3. ( )/CIT(A) 4. /CIT 5. /DR 6. /GF