M/S DVARA TRUST (FORMERLY KNOWN AS IFMR TRUST), CHENNAI V. ACIT NON CORPORATE CIRCLE 13 (1), CHENNAI

ITA 1761/CHNY/2018

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 6251 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-08-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 22-05-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Revision of order; Audit objection; Capital expenditure
• Section: 263; 143(3); 142(1)

Judgement Text

आयकर अपीलीय अिधकरण ‘ए’ ायपीठ चे ई म । IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH, CHENNAI माननीय +ी महावीर िसंह, उपा12 एवं माननीय +ी मनोज कु मार अ6वाल ,लेखा सद9 के सम2। BEFORE HON’BLE SHRI MAHAVIR SINGH, VICE PRESIDENT AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकर अपील सं./ ITA No.1761/Chny/2018 (िनधाBरण वषB / Assessment Year: 2013-14) M/s. Dvara Trust (formerly known as IFMR Trust) IIT-M Research Park, Phase 1, 10 th Floor, No.1, Kanagam Village, Taramani, Chennai – 600 113. बनाम/ V s. ACIT Non Corporate Circle-13(1), Chennai. थायी लेखा सं./जीआइ आर सं./P AN /GI R No . AAAT I -1 5 8 0 -P (अपीलाथ /Appellant) : ( थ / Respondent) अपीलाथ की ओरसे/ Appellant by : Shri R. Vijayaraghavan (Advocate) – Ld. AR थ की ओरसे/Respondent by : Shri ARV Sreeenivasan (Addl. CIT) –Ld. DR सुनवाई की तारीख/Date of Hearing : 01-08-2022 घोषणा की तारीख /Date of Pronouncement : 17-08-2022 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. By way of this appeal, the assessee contest the validity of revision order passed by Learned Principal Commissioner of Income Tax-10, Chennai [PCIT] u/s 263 on 29-03-2018 for Assessment Year (AY) 2013-14. The assessment order which is subjected to revision was passed by Ld. Assessing Officer (AO) u/s.143(3) of the Act on 31- 03-2016. The grounds taken by the assessee read as under: 1. The impugned order passed by the Commissioner of Income Tax ['CIT'] is contrary to law, facts and circumstances of the case. ITA No.1761/Chny/2018 - 2 - 2. Impugned order is void and unsustainable 2.1 The impugned order passed by the CIT is grossly erroneous and void since the order passed by the Assessing Officer ['AO'] is not prejudicial to the interests of the revenue. 2.2 The CIT ought to have appreciated that assumption of jurisdiction under section 263 of the Act based on audit objection is unsustainable. 2.3 The CIT ought to have appreciated that assumption of jurisdiction under section 263 of the Act is invalid since the Assessing Officer has completed the assessment after duly verifying all particulars of income / expenses and as such initiation of proceedings under section 263 of the Act amounts to review of assessment order which is unwarranted. 2.4 The CIT ought to have appreciated that, based on identical facts for the immediately preceding AY 2012-13, the Hon'ble Tribunal had already held the principle issue in favour of the Appellant and as such assumption of jurisdiction under section 263 of the Act to relook the same facts is unwarranted. 2.5 The CIT erred in remitting the issue back to the files of the Assessing Officer without appreciating the fact that the Appellant had already made detailed submissions before the AO / CIT and as such there was no necessity to remit the issue to the files of the Assessing Officer. 2.6 The CIT erred in not following the binding decision of the Hon'ble Tribunal for the immediately preceding AY 2012-13 which is based on identical facts which was demonstrated before the Assessing Officer / CIT. 2.7 The principle issue is debatable as such invocation of jurisdiction under Section 263 of the Act is void ab initio. 3. The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra as also all consequential relief thereto. 4. The Appellant craves leave to add, alter, amend, substitute, rescind, modify and/or withdraw in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal. 2. Drawing attention to the grounds of appeal, the Ld. AR submitted that the regular assessment was completed by Ld. AO after due verification of all particulars of income / expenses and therefore, proceedings u/s. 263 of the Act amounts to review of assessment. To support the arguments, Ld. AR drew attention to the order of Tribunal in assessee’s own case for earlier assessment years. The Ld. CIT-DR, on the other hand, justified revisionary jurisdiction on the ground that the issues as flagged in the revision order was never examined or verified by Ld. AO. Having heard rival submission and after perusal of case records, our adjudication would be as under. ITA No.1761/Chny/2018 - 3 - 3. The assessee was assessed u/s. 143(3) of the Act on 31-03-2016 accepting returned loss of Rs.176.01 Lacs. The assessment order take note of the fact that notice u/s 142(1) was issued on 12.08.2015 which was responded to by the assessee. 4. Subsequently, upon perusal of case records, Ld. PCIT proposed revision u/s. 263 and show-caused assessee on the ground that the assessee claimed expenses for Rs.901.30 Lacs of the subsidiary entities who were independent companies with separate legal status and also assessable to income tax in their own status. When the resulting income was likely to arise in the hands of subsidiary companies, the claim of expenses would not be allowable to the assessee. 5. The assessee pointed out that it carried out two distinct business activities viz. (i) Segment-I: Incubation of new entities; (ii) Segment-II: Providing Shared services & Infrastructure services and loans / investments. It was submitted that for AY 2012-13 onwards, the assessee carried out only Segment-II business activities and therefore, the appellate orders for AYs 2009-10 and 2010-11 which were in respect of Segment-I business activity would not be applicable for this year. The appellate order for AY 2012-13 was stated to be reversed by the Tribunal in ITA No.962/Mds/2016 order dated 16-02-2017 wherein findings was given by Tribunal that findings of earlier years with regard to incubation of new entities would not apply to AY 2012-13. The Ld. AO was also directed to consider various streams of income earned by the assessee and allow the related expenses incurred on such income under appropriate heads. It was also submitted that the AO called for ITA No.1761/Chny/2018 - 4 - specific details regarding nature of income and expenditure and therefore, revision u/s. 263 would not be valid. 6. However, the Ld. PCIT noted that the Tribunal, in its order for earlier years upheld the position of the department that the incubation expenses incurred by the assessee were pre-operative expenses for promoting new units and as such these are not deductible as revenue expenditure. The assessee acted as a provider and a facilitator. The actual service activities were carried out by micro individual units. Therefore, the stand of revenue was confirmed by the Tribunal. However, in Tribunal order for AY 2012-13, it was held that the assessee had not debited any expenditure towards incubation expenses under Segment-I and it had carried out only Segment-II business activities during the year. Accordingly, Ld. AO was directed to go through the relevant agreement and give a finding as to whether the activities would fall within the ambit of business income of the assessee. However, in the present order, the Ld. AO did not examine the stated issue and there was no finding in the assessment order as to whether or not the assessee was carrying on the incubation activities. The returned loss by the assessee was simply accepted without any verification of the said issue and therefore, the provisions of Sec. 263 of the Act were attracted. Citing various judicial pronouncements governing the revision of order u/s. 263 of the Act, the assessment order was set aside and the Ld. AO was directed to examine the nature of activities carried out by the assessee during this year and render a finding as to whether the assessee was carrying on any business in the nature of incubation activity or otherwise and take a decision as per law after affording opportunity of hearing to the ITA No.1761/Chny/2018 - 5 - assessee. Aggrieved to the aforesaid, the assessee is in further appeal before us. 7. Upon perusal of notice u/s 142(1) as issued by Ld. AO during the course of regular assessment proceedings, the assessee was, inter- alia, directed to explain ‘Income from shared services’ and ‘Income from Infrastructure services.’ The assessee was also directed to file the details of ‘Space Sharing Cost’ and ‘Employee sharing Cost. The same was responded to by the assessee vide reply dated 27.08.2015 wherein it was submitted that income from shared services represent income earned by the Trust by providing varied services to group entities. The income from infrastructure services was stated to have arisen from sub-letting of working space to group entities and providing other related services. In subsequent reply, the assessee also provided party-wise break up of income along with agreements. In reply dated 28.03.2016, the assessee submitted working of expenses that were incurred to earn such income. Considering the same, Ld. AO chose to accept the returned loss filed by the assessee. 8. We find that coordinate bench has passed one order in case of this assessee (authored by one of us) for AYs 2011-12, 2012-13 & 2014-15 vide ITA Nos.233/Chny/2019 & ors. on 14.03.2022 wherein the findings rendered by the bench was as under: - Our findings and Adjudication 11. After going through the orders of Tribunal in earlier years, we find that in order for AY 2012-13, it was the observation of the Tribunal that the assessee had not debited any expenditure towards ‘incubation expenses’. It was also observed by the bench that the assessee had not carried out any Segment-I business activity i.e. incubation of new entities during the year under appeal and it had carried out only Segment-II business activity. This vital fact was lost sight by the lower authorities. The allowability of the expenses in the Profit & Loss account was to be adjudicated based on the findings to be given with regard to various streams of income in the form of shared services / infrastructure services etc. by ITA No.1761/Chny/2018 - 6 - the lower authorities and the head of income thereon. Accordingly, Ld. AO was directed to go through relevant agreements and give findings as to whether the same would fall within the objects of the assessee trust so as to fall within the ambit of business income of the assessee. If the same was to construed as ‘income from other sources’ even then the allowability of expenses would have to be considered in the light of the provisions of Sec.57(iii) of the act. It was agreed position that findings given in earlier years with regard to incubation of new entities would not apply to the facts during the years under appeal. Accordingly, entire assessment was restored to the file of Ld. AO for de-novo adjudication. However, ignoring the same and without making due examination / verification as directed by the Tribunal, Ld. AO merely held that the activities undertaken by the assessee were in continuation of incubation activities. The two streams of income were shown as ‘other income’ and therefore, the same were non-operational income. Another allegation was that the assessee was exercising significant control over related parties and since the expenses were already claimed by its 100% subsidiaries, the assessee could not claim these expenses as the same would be against the principle that one could not profit from trading with oneself. These findings are mere allegations and not fact-based findings. Nothing has been brought on record to support this conclusion. The Ld. AO did not follow the directions of the Tribunal and did not make any efforts to go through the agreements etc. to render a finding as to whether the streams of income as earned by the assessee could be considered as business income of the assessee. It merely held that these activities were in continuation of incubation activities as evident from the website. Further, the allowability of expenses u/s 57(iii) was not considered by Ld. AO. Therefore, the findings of Ld. AO are bereft of any merits and contrary to the directions of the Tribunal. 12. The Ld. CIT(A), in our opinion, has clinched the issue in correct perspective and diligently examined the main objects of the assessee. Since Ld. AO had failed to carry out the directions of Tribunal, Ld. CIT(A) rightly went ahead to examine the activities carried out by the assessee. After analyzing the Trust Deed, concrete findings were rendered that shared and Infrastructure activities could not be held to be in the nature of business activities and therefore, the same would be assessable under the head ‘income from other sources’. As per statutory mandate, the expenditure expanded by the assessee to earn such an income would be an allowable deduction u/s 57(iii). Since the directions of Ld. CIT(A) are in accordance with law, we concur with the findings of Ld. CIT(A) in the impugned order and accordingly, dismiss the appeal of the revenue. Cross-Appeals for AY 2011-12 13. In this year, the assessee has earned total receipts of Rs.937.97 Lacs as detailed in para-5 of assessment order dated 12.03.2014. The assessee incurred expenditure of Rs.1284.12 Lacs. The Ld. AO, after examining the expenditure, specifically disallowed incubation expenses, capital expenditure (consultancy and legal / professional charges) and diminution in the value of investments. However, in the alternative, Ld. AO disallowed entire expenditure for various reasons as stated in para-10 of the order. In other words, the returned loss of Rs.1427.79 Lacs was reduced to Rs.143.66 Lacs after disallowing entire expenditure. The interest on fixed deposits for Rs.53.55 Lacs was brought to tax as ‘income from other sources’. 14. The Ld. CIT(A) noted that in this year, the assessee had carried out activities under both the segments. Accordingly, following Tribunal’s order for AY ITA No.1761/Chny/2018 - 7 - 2009-10, the disallowance of incubation expenses, consultancy and legal / professional charges was confirmed since the same was incurred for conducting studies and research for setting up of individual units in different sectors. The receipts of the assessee would fall under the head ‘income from other sources’. However, the assessee would be entitled to claim related expenditure u/s 57(iii) except expenses falling under the head incubation expenses, consultancy and legal / professional charges. The provision for diminution in value of investment was already disallowed by the assessee in the computation of income and disallowing entire expenditure would amount to double disallowance. Concurring with the same, Ld. AO was directed to verify the facts and delete the double disallowance. Accordingly, the appeal was partly allowed which has given rise to cross-appeal before us. 15. Keeping in view the fact that we have confirmed the impugned order in AY 2012-13, the adjudication for this year is also to be confirmed. The adjudication of Ld. CIT(A) is based on Tribunal’s order for AY 2009-10 as well as its own finding for AY 2012-13 which we have already confirmed. In other words, the cross- appeals stand dismissed. Revenue’s Appeal for AY 2014-15 16. In this year, entire receipts have been brought to tax as ‘income from other sources’ and the assessee has been allowed deduction of 2% of the receipts. The Ld. CIT(A) noted that the assessee offered substantial income towards capital gain followed by Segment-II operation. No expenses were incurred for Segment-I activities. Accordingly, the findings of AY 2012-13 were applicable. Aggrieved, the revenue is in further appeal before us. 17. Since we have confirmed first appellate order for AY 2012-13 which has been followed by Ld. CIT(A) in this year, the adjudication of this year would not require any interference on our part. In other words, the revenue’s appeal stands dismissed 9. It could thus be seen that for AY 2012-13, the Tribunal has confirmed the first appellate order wherein it was held that the shared and Infrastructure activities could not be held to be in the nature of business activities and therefore, the same would be assessable under the head ‘income from other sources’. As per statutory mandate, the expenditure expanded by the assessee to earn such an income would be an allowable deduction u/s 57(iii). In AY 2011-12, the assessee had carried out activities under both the segments. The Ld. CIT(A), following Tribunal’s order for AY 2009-10, upheld the disallowance of incubation expenses, consultancy and legal ITA No.1761/Chny/2018 - 8 - / professional charges since the same was incurred for conducting studies and research for setting up of individual units in different sectors. It was further held that the receipts of the assessee would fall under the head ‘income from other sources’ and the assessee would be entitled to claim related expenditure u/s 57(iii) except expenses falling under the head incubation expenses, consultancy and legal / professional charges. This adjudication has also been confirmed by the bench in order dated 14.03.2022. In AY 2014-15, entire receipts were brought to tax by Ld. AO as ‘income from other sources’ and the assessee was allowed deduction of 2% of the receipts. The Ld. CIT(A) noted that the assessee offered substantial income towards capital gain followed by Segment-II operation. No expenses were incurred for Segment-I activities. Accordingly, the findings of AY 2012-13 were applicable. The revenue’s appeal against the same was dismissed by the bench in the said order. 10. Upon due consideration of adjudication of AYs 2011-12, 2012-13 & 2014-15, it emerges that incubation expenses incurred by the assessee are to be disallowed whereas other receipts are to be brought to tax as ‘Income from other sources’ and the assessee would be entitled to claim related expenditure u/s 57(iii). 11. In the light of above position, we would confirm the revision order, however, with certain modifications since the earlier order of the Tribunal for AY 2009-10 dated 07.07.2014 as available to Ld. AO was not considered while framing the assessment for this year. Further, fresh adjudication has been done by the bench for AYs 2011-12, 2012- 13 & 2014-15 in its latest order which would have material bearing on ITA No.1761/Chny/2018 - 9 - the assessment. In terms of latest order dated 14.03.2022, Ld. AO is directed to disallow incubation expenses, if any, as incurred by the assessee. The income would be assessed as ‘Income from other sources’ against which related expenditure would be allowable in terms of Sec.57(iii). The Ld. AO is directed to reframe the assessment on above lines. 12. The appeal stand partly allowed in terms our above order. Order pronounced on 17 th August, 2022. Sd/- (MAHAVIR SINGH) उपा12 /VICE PRESIDENT Sd/- (MANOJ KUMAR AGGARWAL) लेखा सद9 / ACCOUNTANT MEMBER चे+ई / Chennai; िदनांक / Dated : 17-08-2022 EDN/- आदेश की Vितिलिप अ6ेिषत/Copy of the Order forwarded to : 1. अपीलाथ /Appellant 2. यथ /Respondent 3. आयकर आयु (अपील)/CIT(A) 4. आयकर आयु /CIT 5. िवभागीय ितिनिध/DR 6. गाड फाईल/GF