NELSUN PAPER MILL LIMITED, CHENNAI V. ITO CORPORATE WARD 4(4), CHENNAI

ITA 1710/CHNY/2019

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 0239 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 6 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 30-05-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MRS R ANITA
• Assessee Lawyers: G BASKAR
• Keywords: Earning of tax free income; Proportionate interest; Commercial expediency
• Section: 250

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: CHENNAI . , . , BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER ./ ITA NO.1710/CHNY/2019 /ASSESSMENT YEAR: 2013-14 M/S.NELSUN PAPER MILL LTD., (FORMERLY KNOWN AS M/S.KGS NELSUN PAPER MILL PVT. LTD.), KGS CORPORATE HOUSE NO.43, BESANT AVENUE ROAD, ADYAR, CHENNAI-600 020. VS. THE INCOME TAX OFFICER, CORPORATE WARD-4(4), 121, M.G.ROAD, CHENNAI-600 034. [PAN: AAACN 2359 J] ( /APPELLANT) ( /RESPONDENT) ./ ITA NO.1713/CHNY/2019 /ASSESSMENT YEAR: 2013-14 THE DY. COMMISSIONER OF- INCOME TAX, CORPORATE WARD-4(4), 121, M.G.ROAD, CHENNAI-600 034. VS. M/S.KGS NELSUN PAPER MILL PVT. LTD., KGS CORPORATE HOUSE NO.43, BESANT AVENUE ROAD, ADYAR, CHENNAI-600 020. [PAN: AAACN 2359 J] ( /APPELLANT) ( /RESPONDENT) ASSESSEE BY : MR.G.BASKAR, ADV. DEPARTMENT BY : MRS. R. ANITA, JCIT /DATE OF HEARING : 10.11.2020 /DT. OF PRONOUNCEMENT : 23.12.2020 ITA NOS.1710 & 1713 /CHNY/2019 :- 2 -: / O R D E R PER SHRI S. JAYARAMAN, ACCOUNTANT MEMBER: THE ASSESSEE FILED APPEAL IN ITA NO.1710/C/2019 & THE REVENUE FILED APPEAL IN ITA NO.1713/C/2019 AGAINST THE ORDER OF T HE COMMISSIONER OF INCOME TAX (APPEALS)-8, CHENNAI, IN ITA NOS.59 & 28 9/16-17 DATED 12.03.2019 FOR THE AY 2013-14. 2. M/S. KGS NELSUN PAPER MILL LTD., THE ASSESSEE IS ENGAGED IN THE BUSINESS OF KRAFT PAPER FROM THE BASIC RAW MATERIAL OF WASTE KRAFT PAPER. WHILE MAKING THE ASSESSMENT FOR THE AY 2013-14, THE AO OBSERVED FROM THE FINANCIALS OF THE ASSESSEE COMPANY THAT ITS TOT AL BORROWING WAS RS.25.16 CRS. DURING THE YEAR AS AGAINST RS.10.48 CRS. DURIN G THE LAST YEAR. THE INTEREST EXPENDITURE INCURRED DURING THE YEAR WAS R S.5.85 CRS. AS AGAINST RS.2.99 CRS IN THE LAST YEAR. HE HAS ALSO NOTICED THAT THE ASSESSEES TURNOVER FELL FROM RS.70.08 CRS. IN THE LAST YEAR T O RS.61.12 CRS. DURING THE YEAR. THEREFORE, THE AO HELD THAT THE BORROWED FUN D WAS UTILIZED FOR INVESTMENT AND NOT IN THE ASSESSEES BUSINESS. THE REFORE, HE WORKED OUT THE PROPORTIONATE INTEREST ON SUCH INVESTMENT AT RS .3.41 CRS. AND DISALLOWED HOLDING THAT IT WAS NOT AT ALL RELATED T O THE ASSESSEES BUSINESS. FURTHER, THE AO FOUND THAT THE ASSESSEE HAS BORROWE D RS.39.96 CRS. ON WHICH, IT INCURRED INTEREST EXPENDITURE OF RS.5.85 CRS., IT HAS INVESTED RS.25.00 CRS. IN THE EQUITIES OF SUBSIDIARY COMPANY , M/S.COCHIN KAGAZ LTD., WHICH WOULD YIELD ONLY AN EXEMPT INCOME. THEREFORE , HE PROPOSED TO MAKE DISALLOWANCE U/S.14A R.W.R.8D. THE ASSESSEE SUBMIT TED THAT THE INVESTMENT ITA NOS.1710 & 1713 /CHNY/2019 :- 3 -: MADE IN THE SUBSIDIARY COMPANY WAS WITH AN INTENTIO N TO WIDEN THE BUSINESS BASE NOT TO EARN TAX FREE RETURNS. THE ASSESSE IS NOT INTO THE BUSINESS OF INVESTMENT, DIVIDEND EARNED FROM THIS INVESTMENT WO ULD BE PURELY INCIDENTAL. THEREFORE, IT WAS SUBMITTED THAT NO DI SALLOWANCE IS REQUIRED. HOWEVER, THE AO HELD THAT THE ASSESSEE FAILED TO ST ATE HOW THE IMPUGNED INVESTMENT WILL GENERATE TAXABLE REVENUE OR INCOME. THEREFORE, HE INVOKED SEC.14A R.W.R.8D. FOR ARRIVING OUT THE DISALLOWANC E U/S.14A R.W.R.8D, FROM THE TOTAL INTEREST CLAIM, THE AO DEDUCTED THE DISAL LOWANCE ALREADY MADE AT RS.3.41 CRS. AND ON THE BALANCE INTEREST OF RS.3.24 CRS, HE MADE DISALLOWANCE U/R.8D(2)(II) & (III) AT RS.78,21,795/ -. AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEFORE THE COMMISSIONER OF INCOME TAX(A). THE LD.CIT(A) HELD THAT THE ASSESSEE COMPANY CLAIMS TO HAVE BORROWED MONIES FOR THE SAKE OF ITS EXPANSION AS WELL AS TO MAKE IN VESTMENT. THERE IS NO DIRECT NEXUS BETWEEN THE BORROWINGS OF THE ASSESSEE AS WELL AS SPECIFIC INVESTMENTS. THEREFORE, HE DELETED THE INTEREST DI SALLOWANCE MADE AT RS.3.41 CRS. HOWEVER, THE LD.CIT(A) DIRECTED THE A O TO TAKE THE ENTIRE INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE AT RS. 5.85 CRS. FOR COMPUTING THE DISALLOWANCE U/S.14A R.W.R.8D HOLDING THAT THIS WOULD SUFFICIENTLY TAKE CARE OF ANY DIVERSION OF BORROWED CAPITAL TOWARDS M AKING TAX EXEMPT INVESTMENTS. ACCORDINGLY, THE LD.CIT(A) DIRECTED T HE AO TO RE-COMPUTE THE DISALLOWANCE U/S.14A R.W.R8D BY TAKING THE INTEREST EXPENDITURE AT RS.5.75 CRS. AGGRIEVED AGAINST THE ORDER OF THE LD.CIT(A), THE ASSESSEE AS WELL AS THE REVENUE FILED THESE APPEALS. ITA NOS.1710 & 1713 /CHNY/2019 :- 4 -: 3. THESE CASES WERE HEARD THROUGH VIDEOCONFERENCING . THE LD.AR SUBMITTED THAT THE LD.CIT(A) ERRED IN UPHOLDING THE ADDITION U/S.14A R.W.R.8D(2)(II) & (III) AND IN THIS REGARD, RELIED ON THE DECISION IN THE CASE OF M/S.REDIGNTON INDIA LTD. V. ACIT AND IN THE CASE OF CIT V. CHETTINAD LOGISTICS PVT. LTD. REPORTED IN 95 TAXMANN.COM 250 (SC). THE LD.AR SUBMITTED THAT M/S.COCHIN KAGAZ LTD., IS A SUBSIDIA RY COMPANY OF THE ASSESSEE AND THE INVESTMENT HAS BEEN MADE WITH AN I NTENTION OF WIDENING THE BUSINESS BASE AND NOT TO EARN THE TAX FREE RETU RNS. INVITING OUR ATTENTION TO THE RELEVANT PORTION OF THE ORDER OF T HE LD.CIT(A) AND THE FINANCIALS PLACED IN PAPER BOOK, THE LD.AR SUBMITTE D THAT THE ASSESSEE MADE AN INVESTMENT OF RS.25,00,72,454/- AS ON 31.03 .2013 AS TRADE INVESTMENT TOWARDS FULLY PAID UNQUOTED EQUITY SHARE S OF 18,86,149 AT FACE VALUE OF RS.10/- PER SHARE IN ITS SUBSIDIARY COMPAN Y, M/S.COCHIN KAGAZ LTD., WHILE CORRESPONDING THE INVESTMENT AS ON 31.03.2013 WAS RS.11,04,54,185/- AS PER THE NOTE-9. INVITING OUR ATTENTION TO THE MEMORANDUM OF ASSOCIATION OF THE ASSESSEE COMPANY, WHEREIN, UNDER 3(B) MATTERS WHICH ARE NECESSARY FOR FURTHERANCE OF THE OBJECTS SPECIFIED IN CLUASE-III(A), CLUASE-12 READ AS UNDER: .TO PROMOTE ANY COMPANY OR COMPANIES FOR THE PURP OSES OF ACQUIRING ALL OR ANY OF THE PROPERTY, RIGHTS AND LIABILITIES OF T HE COMPANY OR FOR ANY OTHER PURPOSE WHICH MAY SEEM DIRECTLY OR INDIRECTLY CALCU LATED TO BENEFIT THIS COMPANY.. THE LD.AR SUBMITTED THAT THE ASSESSEE INVESTED THE IMPUGNED SUM FOR WIDENING ITS BUSINESS BASE IN ACCORDANCE WITH I TS OBJECTS, SUPRA. THEREFORE, THE INVESTMENT HAS NOT BEEN MADE WITH A PURPOSE TO EARN TAX ITA NOS.1710 & 1713 /CHNY/2019 :- 5 -: FREE RETURNS. THE ASSESSEE HAS NOT RECEIVED ANY DI VIDEND SO FAR FROM THE SUBSIDIARY COMPANY AS IT IS IN THE INITIAL STAGES. SINCE THE INVESTMENT IS MADE ON ACCOUNT OF BUSINESS EXPEDIENCY, THE INVESTM ENT MADE BY THE ASSESSEE IN ITS SUBSIDIARY COMPANY ARE NOT TO BE RE CKONED FOR DISALLOWANCE U/S.14A R.W.R.8D. PER CONTRA, LD.DR SUBMITTED THAT THE AO HAS CLEARLY ESTABLISHED IN THE ASSESSMENT ORDER THAT THE AMOUNT BORROWED DURING THE YEAR IS FULLY UTILIZED FOR THE PURPOSE OF INVESTMEN T AND NOT IN THE BUSINESS. THEREFORE, THE LD.CIT(A) ERRED IN HOLDING THAT THE AO HAS NOT BEEN ABLE TO ESTABLISH ANY DIRECT LINK BETWEEN THE BORROWINGS AN D THE TAX EXEMPT INVESTMENTS. THE LD.DR WANTED TO SHARE CERTAIN DOC UMENT TO SHOW THAT THE AMOUNT ADVANCED BY THE ASSESSEE TO ITS SISTER C ONCERN WAS NOT USED FOR THE PURPOSE OF BUSINESS. HOWEVER, THE LD.AR STRONG LY OBJECTED TO THE ACTION OF THE LD.DR STATING THAT SHARING OF THE DOCUMENT A T THE TIME OF HEARING WITHOUT FURNISHING THOSE COPIES IN ADVANCE TO THE A SSESSEES REPRESENTATIVE / COURT SHOULD NOT BE PERMITTED AND THEREFORE, WE D ID NOT PERMIT THE LD.DR TO SHARE SUCH IMPUGNED DOCUMENT. 4. WE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE RELEVANT MATERIALS. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF KRAFT PAPER FROM THE BASIC RAW MATERIAL OF WASTE KRAFT PAPER. ITS ADMIT TED TURNOVER DURING THE YEAR RS.61.12 CRS. AS AGAINST RS.70.82 CRS. IN THE LAST YEAR. IT IS SEEN AS ON 31.03.2013, THE ASSESSEE HAS FULLY PAID FOR THE UNQUOTED EQUITY SHARES OF 18,56,149 AT FACE VALUE OF RS.10/- PER SHARE IN ITS SUBSIDIARY COMPANY VIZ., M/S.COCHIN KAGAZ LTD., AT RS.25,00,72,454/-. THE CORRESPONDING ITA NOS.1710 & 1713 /CHNY/2019 :- 6 -: INVESTMENT AS ON 31.03.2012 WAS AT RS.11,04,54,185/ -. THUS, THE ASSESSEE HAS MADE A FRESH INVESTMENT OF RS.13.96 CR S. DURING THE YEAR. THE AO NOTICED THAT THE ASSESSEE HAS CLAIMED HUGE F INANCIAL COST DURING THE YEAR AT RS.5.85 CRS. THOUGH, THE ASSESSEE CLAIMED THAT THE IMPUGNED EXPENDITURE IS ON ACCOUNT OF BUSINESS EXPEDIENCY BE FORE THE LD.CIT(A) IN ITS GROUNDS OF APPEAL, THIS ISSUE WAS NOT EXAMINED BY THE AO IN THE ASSESSMENT ORDER. THE LD.CIT(A) HAS MERELY EXTRACT ED THE ASSESSEES SUBMISSIONS AND OBSERVED THAT THE ASSESSEE COMPANY CLAIMS TO HAVE BORROWED MONIES FOR THE SAKE OF ITS EXPANSION AS WE LL AS TO MAKE INVESTMENTS. THE BORROWINGS HAVE GOT PLOUGHED INTO THE COMMON BANK ACCOUNT AND COMMON EXPENDITURE OF THE COMPANY. THE RE IS NO DIRECT NEXUS BETWEEN THE BORROWINGS OF THE ASSESSEE AS WELL AS A NY SPECIFIC INVESTMENTS, ETC. HOWEVER, IT IS NOT KNOWN ON WHAT MATERIAL/EVID ENCE, THE LD.CIT(A) HAS ARRIVED ON SUCH CONCLUSION. PRIMA FACIE, THE FINAN CIALS INDICATE THAT THE ASSESSEE DURING THE YEAR HAS INCURRED A HUGE LOSS O F RS.5,51,97,022/- (BEFORE TAX) WHICH REDUCED THE SHAREHOLDERS FUNDS FROM RS.18.05 CRS. AS ON 31.03.2012 TO RS.12.27 CRS. AS ON 31.03.2013. T HE LOWER AUTHORITIES HAVE NOT EXAMINED AS TO WHAT ARE THE DATE(S) ON WHI CH THE SHARES WERE ACQUIRED AND WHETHER ON SUCH DATE(S), THE ASSESSEE HAD ANY NON-INTEREST BEARING FUND, ETC. THEREFORE, IN OUR CONSIDERED VI EW, THE LOWER AUTHORITIES HAVE NOT EXAMINED, THE RELEVANT ISSUES, PARTICULARL Y: I. WHETHER THE BORROWED FUNDS WERE USED FOR THE ACQUIS ITION OF SHARES IN THE SUBSIDIARY COMPANY? II. THE PURPOSE FOR WHICH THE ASSESSEE ACQUIRED THE IMP UGNED SHARES AND WHEN THE SUBSIDIARY IS CLAIMED TO BE IN INTIAL STAG ES WHETHER THE PREMIUM ITA NOS.1710 & 1713 /CHNY/2019 :- 7 -: PAID IS COMMENSURATING AND WHAT THE SISTER CONCERN DID WITH THAT MONEY ADVANCED BY THE ASSESSEE, IN OTHER WORDS, WHETHER T HIS WAS REALLY DONE AS A MEASURE OF BUSINESS OR COMMERCIAL EXPEDIENCY, ETC. THEREFORE, WE DEEM IT FIT TO SET-ASIDE THE ORDER O F THE LD.CIT(A) AND REMIT THE ISSUES BACK TO THE AO FOR A FRESH EXAMINA TION. SINCE THE ISSUE RELATED TO THE DISALLOWANCE U/S.14A R.W.R.8D IS ALS O INTER-MIXED WITH THE DETERMINATION AS TO WHETHER THE ACQUISITION OF SHAR ES IN THE SUBSIDIARY COMPANY IS FOR THE PURPOSE OF BUSINESS OR INVESTMEN T OR OTHERWISE, AN ISSUE WHICH IS REMITTED, SUPRA, WE ARE OF THE VIEW THAT T HIS ISSUE ALSO REQUIRES TO BE REMITTED BACK TO THE AO FOR A FRESH EXAMINATION. THE ASSESSEE SHALL PRODUCE ALL ORIGINAL PRIMARY/SECONDARY EVIDENCES/MA TERIALS BEFORE THE AO IN SUPPORT OF ITS CONTENTIONS SO THAT THE GENUINENE SS OF THE CLAIMS COULD BE EXAMINED AND APPROPRIATELY DEALT WITH BY THE AO. T HE AO ON DUE EXAMINATION AND AFTER AFFORDING ADEQUATE OPPORTUNIT Y TO THE ASSESSEE, SHALL PASS AN ORDER ON MERITS. 5. IN THE RESULT, THE APPEALS FILED BY THE ASSESSE E AS WELL AS THE REVENUE ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPO SES. ORDER PRONOUNCED ON THE 23 RD DAY OF DECEMBER, 2020, IN CHENNAI. SD/- SD/- ( . ) ( V. DURGA RAO ) /JUDICIAL MEMBER ( . ) (S. JAYARAMAN) /ACCOUNTANT MEMBER ITA NOS.1710 & 1713 /CHNY/2019 :- 8 -: /CHENNAI, /DATED: 23 RD DECEMBER, 2020. TLN /COPY TO: 1. /APPELLANT 4. ' /CIT 2. /RESPONDENT 5. /DR 3. ' ( ) /CIT(A) 6. /GF