THE ACIT 10(2), MUMBAI V. M/S. UVI HOLIDAYS LTD, MUMBAI

ITA 1798/MUM/2006

• Counselvise Citation: 179819914 RSA 2006
• Duration Of Justice: 5 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 06-06-2011
• Assessment Year: 2001-2002
• Appeal Filed On: 17-03-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G P TRIVEDI
• Keywords: Business income; Earning of tax free income; Commercial expediency
• Section: 14A; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E : MUMBAI BEFORE SHRI R.S. PADVEKAR,(JM) AND SHRI RAJENDRA S INGH ,(AM) ITA NO.1798/MUM/2006 ASSESSMENT YEAR :2001-02 THE ASSTT. COMMISSIONER OF INCOME TAX -10(2) ROOM NO.432, 4 TH FLOOR AAYAKAR BHAVAN M.K. ROAD, NEW MARINE LINES MUMBAI-400 020. ..( APPELLANT ) VS. M/S. UVI HOLIDAYS LIMITED RUNWAL CHAMBERS, 2 ND FLOOR 1 ST ROAD, CHEMBUR MUMBAI-400 071. ..( RESPONDENT ) P.A. NO. (AAACU 0762 E) APPELLANT BY : SHRI G.P. TRIVEDI RESPONDENT BY : NONE O R D E R PER RAJENDRA SINGH (AM). THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 12.1.2006 OF CIT(A) FOR THE ASSESSMENT YEAR 2001-02 . THE ASSESSEE IN THIS APPEAL HAS RAISED DISPUTES ON THREE GROUNDS. 2. THE FIRST DISPUTE IS REGARDING DISALLOWANCE OF I NTEREST U/S. 36(1)(III) OF THE INCOME TAX ACT. THE ASSESSING OFFICER DURING T HE ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD PAID INTERE ST OF RS.32,57,566/- ON BORROWED FUNDS OF RS.1,78,00,180/-. THE ASSESSEE H AD ALSO ADVANCED INTEREST FREE AMOUNTS OF RS.10,07,442/- AND RS.81,5 8,000/- TO M/S. UVI LEIZURE HOLIDAYS LTD. AND A SUM OF RS.54,92,008/- TO M/S. UVI E-COM LTD. THE ASSESSING OFFICER THEREFORE ASKED THE ASSESSEE TO EXPLAIN AS TO WHY INTEREST PROPORTIONATE TO INTEREST FREE ADVANCES GI VEN TO SUBSIDIARIES MENTIONED ABOVE SHOULD NOT BE DISALLOWED. THE ASSE SSEE SUBMITTED THAT THE ITA NO.1798/M/06 A.Y:01-02 2 ULTIMATE OBJECTIVE OF INTEREST FREE ADVANCES TO M/S . UVI LEIZURE HOLIDAYS LTD. WAS FOR THE PURPOSE OF BUSINESS AS THE ASSESSEE WAS IN THE BUSINESS OF TOURS AND TRAVELS. IN RELATION TO M/S. UVI E-COM LTD. NO EXPLANATION WAS GIVEN. THE ASSESSING OFFICER NOTED THAT THOSE TWO SUBSIDIA RIES (I.E. M/S. UVI LEIZURE HOLIDAYS LTD. AND M/S. UVI E-COM LTD.) HAD BEEN GIVE N INTEREST FREE ADVANCES TO THE TUNE OF RS.25,14,252/- AND RS.7,43, 314/-. THE ADVANCES HAD BEEN GIVEN OUT OF BORROWED FUNDS. THE ASSESSIN G OFFICER OBSERVED THAT THE SUBSIDIARIES WERE INDEPENDENT COMPANIES, AND TH EREFORE, MONEY ADVANCED COULD NOT BE SAID TO BE FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. HE REFERRED TO THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. UNITED BROTHERS (89 ITR 17) IN WHICH IT WAS HELD TH AT WHEN THERE WAS NO MATERIAL TO SHOW THAT THE ASSESSEE WAS CARRYING ON ITS BUSINESS, THROUGH THE SUBSIDIARIES, INTEREST COULD NOT BE ALLOWED. HE ALS O REFERRED TO SOME OTHER JUDGMENTS AND DISALLOWED THE INTEREST PROPORTIONATE TO INTEREST FREE ADVANCES TO THE TWO SUBSIDIARIES AMOUNTING TO RS.26 ,82,423/-. IN APPEAL CIT(A) OBSERVED THAT THE ASSESSEE COMPANY WAS IN TH E BUSINESS OF PROVIDING TOUR AND TRAVEL SERVICES AND THE INVESTMENT IN M/S. UVI LEIZURE HOLIDAYS LTD. WAS MADE FOR ACQUIRING FUNCTIONAL CONTROL OF THE SA ID COMPANY SO THAT THE ASSESSEE COULD BE IN A BETTER POSITION TO PROVIDE A CCOMMODATION AND OTHER SERVICES TO ITS CLIENTS. IN REGARD TO M/S. UVI E-C OM CIT(A) OBSERVED THAT OUTSTANDING LOAN IN THE BEGINNING OF THE YEAR WAS R S.41,20,400/- OUT OF WHICH A SUM OF RS.31,12,958/- WAS RECOVERED BY THE ASSESSEE DURING THE YEAR. THE CIT(A) ALSO OBSERVED THAT THE ASSESSEE W AS HAVING SUFFICIENT OWN FUNDS TO MAKE ADVANCES TO M/S. UVI E-COM. THE CIT(A ) DID NOT AGREE WITH THE ASSESSING OFFICER THAT THE INTEREST FREE ADVANC ES WERE NOT FOR THE PURPOSE OF BUSINESS, OR WERE NOT OUT OF OWN FUNDS. HE THEREFORE, DELETED THE ADDITION MADE BY THE ASSESSING OFFICER AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL. 2.1. BEFORE US NO ONE APPEARED TO REPRESENT THE CAS E ON BEHALF OF THE ASSESSEE THOUGH NOTICE HAD BEEN SENT WELL IN TIME N OR ANY ADJOURNMENT ITA NO.1798/M/06 A.Y:01-02 3 APPLICATION WAS RECEIVED. WE THEREFORE, PROCEED TO DECIDE THE APPEAL ON THE BASIS OF MATERIAL ON RECORD AND AFTER HEARING THE L D. DR. 2.2. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF INTEREST PROPO RTIONATE TO INTEREST FREE ADVANCES GIVEN TO SUBSIDIARIES OF THE ASSESSEE COMP ANY I.E., M/S. UVI LEIZURE HOLIDAYS LTD. AND M/S. UVI E-COM. THERE IS NO DISPUTE THAT INTEREST FREE LOANS TO M/S. UVI LEIZURE HOLIDAYS LTD. HAD BEE N GIVEN OUT OF BORROWED FUNDS FROM THE OVERDRAFT ACCOUNT. THE CASE OF THE ASSESSEE IS THAT INTEREST FREE ADVANCES HAD BEEN GIVEN FOR THE PURPOSE OF BUS INESS AS THE ASSESSEE BEING IN THE BUSINESS OF TOURS AND TRAVELS WOULD BE BENEFITED FROM INVESTMENT IN THE SUBSIDIARY WHICH WAS IN THE BUSI NESS OF HOTELS. NO DOUBT IT A SETTLED POSITION AS HELD BY HONBLE SUPREME COU RT IN THE CASE OF GOPAL BROTHERS (288 ITR 1) THAT IN CASE INTEREST FREE ADV ANCES ARE MADE OUT OF COMMERCIAL EXPEDIENCY THE CLAIM OF INTEREST COULD N OT BE DISALLOWED. AN ARGUMENT BASED ON COMMERCIAL EXPEDIENCY CAN BE ACCE PTED ONLY WHEN ITS PROVED THAT MAKING INVESTMENT IN SUBSIDIARY WOULD P ROMOTE THE BUSINESS OF THE ASSESSEE. THE ASSESSEE IS IN THE BUSINESS OF T OUR AND TRAVEL AND THEREFORE, SUCH CLAIM WOULD BE JUSTIFIED IF THERE A RE SHORTAGE OF HOTELS AND THEREFORE ASSESSEE HAD TO PROMOTE HOTELS THROUGH TH E SUBSIDIARY. THE POSITION HERE IS DIFFERENT. IT IS THE HOTELS WHICH NEED THE HELP OF TOUR AND TRAVEL OPERATORS TO FIND CLIENTS. THUS, IT IS THE SUBSIDIARY I.E., M/S. UVI LEIZURE HOLIDAYS LTD. WHICH WOULD BE BENEFITED FROM ASSOCIATION WITH THE ASSESSEE COMPANY AND NOT VICE-VERSA. THEREFORE, IN OUR VIEW THE INVESTMENT IN THE SUBSIDIARY IS NOT FOR ANY COMMERCIAL EXPEDIE NCY BUT FOR THE PURPOSE OF DIVERSIFICATION OF THE EXISTING BUSINESS BY PROMOTI NG INDEPENDENT COMPANY. THE BORROWED FUNDS ADVANCED INTEREST FREE TO THE SU BSIDIARY CANNOT BE SAID TO BE FOR THE PURPOSE OF ITS OWN BUSINESS OR TO PRO MOTE ITS EXISTING BUSINESS. WE THEREFORE, DO NOT AGREE WITH THE CIT(A) THAT THE INTEREST FREE ADVANCE TO M/S. UVI LEIZURE HOLIDAYS LTD. WAS FOR THE PURPOSE O F BUSINESS OF THE ASSESSEE. AS REGARDS THE INTEREST FREE ADVANCES TO M/S. UVI E-COM THE CIT(A) HAS GIVEN A FINDING THAT THE ASSESSEE WAS HA VING INTEREST FREE FUNDS ITA NO.1798/M/06 A.Y:01-02 4 OF ITS OWN, AND THAT ADVANCES HAD BEEN GIVEN FROM S UCH FUNDS. IT HAS NOT BEEN SHOWN THAT ON THE DATE OF INTEREST FREE ADVANC ES SUFFICIENT INTEREST FREE FUNDS WERE AVAILABLE WITH THE ASSESSEE. IN VIEW OF THE ABOVE POSITION WE ARE UNABLE TO SUSTAIN THE ORDER OF THE CIT(A) DELETING THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF INTEREST. WE ACCORDINGL Y SET ASIDE THE ORDER OF THE CIT(A) AND CONFIRM THE ADDITION MADE BY THE ASSESSI NG OFFICER. 3. THE SECOND DISPUTE IS REGARDING DISALLOWANCE OF INTEREST OF RS.7,34,398/- AND A SUM OF RS.37,20,304/- OUT OF OT HER EXPENSES UNDER THE PROVISIONS OF SEC.14A. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD INVESTED A SUM OF RS.1,17,36,900/- IN THE SHARES OF OTHER COMPANIES, THE DIVIDEND INCOME FROM WHICH WAS EXEMPT UNDER SECTION 10(33). THE ASSESSEE DURING THE YEAR HAD RECEIVED DIVIDEND OF RS.3,869/- . THEREFORE, THE ASSESSING OFFICER CALCULATED THE INTEREST RELATING TO INVESTMENT IN SHARES ON THE BASIS OF AVERAGE RATE WHICH CAME TO RS.16,42,03 5/-. THE TOTAL EXPENDITURE ON ACCOUNT OF INTEREST WAS RS.34,16,821 /-. SINCE THE ASSESSING OFFICER HAD ALREADY DISALLOWED INTEREST OF RS.26,82 ,423/- UNDER SECTION 36(1)(III). HE DISALLOWED THE REMAINING INTEREST OF RS.7,34,398/- (RS.34,16,821 RS.26,82,423). SIMILARLY THE ASSES SING OFFICER ALSO ATTRIBUTED 10% OF THE EXPENSES CLAIMED AMOUNTING TO RS.3,73,03,041/- AS TO THE EARNING OF TAX FREE INCOME WHICH CAME TO RS. 37,20,304/-. THE ASSESSING OFFICER THUS DISALLOWED SUMS OF RS.7,34,3 98/- AND RS.37,20,304/- UNDER SECTION 14A OF THE INCOME TAX ACT. IN APPEAL CIT(A) OBSERVED THAT ONLY EXPENDITURE INCURRED IN RELATION TO TAX FREE I NCOME COULD BE DISALLOWED UNDER SECTION 14A. IN THIS CASE THE ASSESSEE HAD R ECEIVED DIVIDEND INCOME OF RS.3,869/- AND THEREFORE, CIT(A) CONFIRMED THE D ISALLOWANCE ONLY TO THE EXTENT OF RS.3,869/- AND DELETED THE BALANCE ADDITI ON AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL. 3.1. WE HAVE HEARD THE LD. DR, PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THERE IS NO DISPUTE THAT THE ASS ESSEE HAD MADE TOTAL INVESTMENT OF RS.1,17,36,900/- IN THE SHARES OF OTH ER COMPANIES INCOME FROM WHICH COULD BE RECEIVED ONLY IN THE FORM OF DI VIDEND WHICH WAS EXEMPT ITA NO.1798/M/06 A.Y:01-02 5 FROM TAX. THOUGH DURING THE RELEVANT YEAR THE ASSE SSEE HAD RECEIVED DIVIDEND ONLY TO THE TUNE OF RS.3,869/- , THE DIVIDEND IF RECEIVED FROM OTHER COMPANIES WAS ALSO NOT TAXABLE. THEREFORE, THE ENT IRE INVESTMENT WAS NOT GOING TO YIELD ANY TAXABLE INCOME. IN OUR VIEW, TH E EXPENDITURE INCURRED IN RELATION TO ENTIRE INVESTMENT HAS TO BE DISALLOWED UNDER SECTION 14A. THE DISALLOWANCE UNDER SECTION 14A OF THE ACT OF EXPENS ES BOTH DIRECT AND INDIRECT HAS TO BE MADE ON A REASONABLE BASIS AFTER ALLOWING SPECIFIC OPPORTUNITY OF HEARING TO THE ASSESSEE AS HELD BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURING CO . LTD. (IN INCOME TAX APPEAL NO.626 OF 2010 DATED 12.8.2010). ONLY THE EX PENSES WHICH CAN BE REASONABLY ATTRIBUTED TO THE EARNING OF THE DIVIDE ND INCOME OR TO THE INVESTMENTS FROM WHICH DIVIDEND INCOME IS RECEIVABL E CAN BE DISALLOWED. IN OUR VIEW THE MATTER REQUIRES FRESH EXAMINATION. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE ISSUE TO THE FI LE OF THE ASSESSING OFFICER FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINAT ION IN THE LIGHT OF THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE O F GODREJ BOYCE MANUFACTURING COMPANY LTD. (SUPRA) AND AFTER ALLOWI NG OPPORTUNITY OF HEARING TO THE ASSESSEE. 4. THE THIRD DISPUTE IS REGARDING ALLOWABILITY OF D EDUCTION UNDER SECTION 80HHD IN RELATION TO OTHER INCOME OF RS .29,04,280/- WHICH CONSISTS OF DIVIDEND INCOME, INTEREST INCOME AND OTHER MISCELLA NEOUS INCOME. DEDUCTION UNDER SECTION 80HHD IS ALLOWABLE IN CASE OF AN ASSESSEE ENGAGED IN THE BUSINESS OF HOTEL/TOUR OPERATOR IN RESPECT O F THE AMOUNTS RECEIVED IN CONVERTED FOREIGN EXCHANGE FOR SERVICES PROVIDED TO FOREIGN TOURISTS. THE ASSESSING OFFICER OBSERVED THAT THE OTHER INCOME ME NTIONED ABOVE HAD NOT BEEN DERIVED FROM SERVICES PROVIDED TO FOREIGN TOUR ISTS AND THEREFORE, HE DID NOT ALLOW CLAIM OF DEDUCTION. IN APPEAL, CIT(A) OB SERVED THAT THE OTHER INCOME INCLUDED DIVIDEND INCOME OF RS.3,859/- WHICH COULD NOT BE ASSESSED AS BUSINESS INCOME. AS REGARDS THE OTHER INCOME CO NSISTING OF INTEREST ETC. CIT(A) OBSERVED THAT THE ASSESSING OFFICER HAD HIMS ELF ASSESSED THE SAME AS BUSINESS INCOME. THE CIT(A) FURTHER OBSERVED THAT DEDUCTION UNDER SECTION ITA NO.1798/M/06 A.Y:01-02 6 80HHD WAS ALLOWABLE ON THE BASIS OF PROFIT OF THE BUS INESS COMPUTED UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSIO N. THEREFORE, THE OTHER INCOME WHICH HAD BEEN ASSESSED AS BUSINESS INCOME B Y ASSESSING OFFICER WOULD BE ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHD. AGGRIEVED BY THE SAID DECISION, THE REVENUE IS IN APPEAL. 4.1. WE HAVE HEARD THE LD. DR, PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING ALLOWAB ILITY OF DEDUCTION UNDER SECTION 80HHD IN RELATION TO OTHER INCOME CONSISTING OF DIVIDEND INCOME, INTEREST INCOME AND OTHER MISCELLANEOUS INCOME. TH E DEDUCTION UNDER SECTION 80HHD IS ALLOWABLE ON THE BASIS OF PROFIT OF BUSINESS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSI ON IN THE RATIO OF AMOUNTS RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE FOR SERVIC ES PROVIDED TO FOREIGN TOURISTS AND, TOTAL RECEIPTS FROM BUSINESS. THEREF ORE ALL ITEMS OF INCOME ASSESSED AS BUSINESS INCOME WOULD BE ELIGIBLE FOR D EDUCTION UNDER SECTION 80HHD. IN THIS CASE THE CIT(A) HAS RIGHTLY OBSERVED THAT THE ASSESSING OFFICER HIMSELF ASSESSED INTEREST AND OTHER MISCELL ANEOUS INCOME AS BUSINESS INCOME. THEREFORE, SUCH INCOME WOULD BE ELIGIBLE FO R DEDUCTION UNDER SECTION 80HHD. WE ALSO AGREE WITH THE CIT(A) THAT THE DIVID END INCOME HAS TO BE ASSESSED AS INCOME FROM OTHER SOURCES AND WILL NOT BE ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHD. WE, THEREFORE, CONFIRM THE ORDE R OF CIT(A). 9. IN THE RESULT APPEAL OF THE REVENUE IS PARTLY AL LOWED IN TERMS OF THE ORDER ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 17.6.2011. SD/- SD/- (R.S. PADVEKAR) (RAJENDRA SINGH ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 17.6.2011. JV.