M/s. L&T Infrastructure Development Projects Ltd., CHENNAI V. ITO, CHENNAI

ITA 2226/CHNY/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81272 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 30-10-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 20-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P RADHAKRISHNAN
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Opportunity of being heard; Earning of tax free income; Commercial expediency
• Section: 143(3); 14A; 147

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , B B ENCH, CHENNAI . , ' $ % , & ' BEFORE SHRI A.MOHAN ALANKAMONY ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./I.T.A.NO. 2226/MDS/2013 ( / ASSESSMENT YEAR: 2007-08) M/S. L&T INFRASTRUCTURE DEVELOPMENT PROJECTS LTD. P.B.NO.979, MOUNT POONAMALLEE ROAD, MANAPAKKAM, CHENNAI-600 089. VS INCOME TAX OFFICER, COMPANY WARD-II(1), CHENNAI-600 034. PAN:AAACL7617D ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR.R.VIJAYARAGHAVAN, ADVOCATE /RESPONDENT BY : MR.P. RADHAKRISHNAN , JCIT / DATE OF HEARING : 30 TH OCTOBER, 2014 /DATE OF PRONOUNCEMENT : 21 ST NOVEMBER, 2014 / O R D E R PER CHALLA NAGENDRA PRASAD, JM: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, CHE NNAI DATED 19.8.2013 FOR THE ASSESSMENT YEAR 2007-08 AR ISING OUT OF ASSESSMENT ORDER PASSED UNDER SECTION 143(3) REA D WITH SECTION 147 OF THE ACT. THE ONLY GRIEVANCE OF THE ASSESSEE IN ITS APPEAL IS THAT COMMISSIONER OF INCOME TAX (APPE ALS) HAS FAILED TO APPRECIATE THAT INVESTMENTS IN SUBSIDIARI ES ARE OUT OF COMMERCIAL EXPEDIENCY AND HENCE SHOULD NOT BE CONSI DERED 2 ITA NO.2226/MDS/2013 FOR DISALLOWANCE UNDER SECTION 14A OF THE ACT. WITH OUT PREJUDICE TO THE ABOVE, WHEN THE ASSESSING OFFICER HAS ADOPTED RULE 8D FOR DISALLOWANCE, THERE IS NO SCOPE FOR ENHANCEMENT BY THE COMMISSIONER OF INCOME TAX (APPE ALS) AND THERE IS NO SCOPE FOR DISALLOWANCE. 2. THE ASSESSING OFFICER WHILE COMPLETING THE ASSES SMENT UNDER SECTION 143(3) READ WITH SECTION 147 OF THE ACT DISALLOWED ` 1,03,10,547/- UNDER SECTION 14A(1) AND ` 1,92,35,628/- UNDER SECTION 14A RAD WITH RULE 8D(2) (III) REJECTING THE SUBMISSIONS OF THE ASSESSEE THAT IT H AD NOT INCURRED ANY EXPENDITURE FOR EARNING DIVIDEND INCOM E AND INVESTMENTS MADE IN SUBSIDIARIES ARE ON COMPULSION BUSINESS EXPEDIENCY. ON APPEAL, COMMISSIONER OF INC OME TAX (APPEALS) THOUGH ACCEPTED THAT DISALLOWANCE UND ER SECTION 14A READ WITH RULE 8D(2)(III) CANNOT BE MAD E AS THE PROVISION OF RULE 8D HAS NO APPLICATION FOR THE ASS ESSMENT YEAR UNDER CONSIDERATION BUT DIRECTED THE ASSESSING OFFICER TO APPORTION INTEREST EXPENSES ON PROPORTIONATE BAS IS BASED ON INVESTMENTS MADE IN SHARES AND MUTUAL FUNDS TO T HE TOTAL ASSETS OF THE COMPANY AT THE BEGINNING OF THE FINAN CIAL YEAR. 3 ITA NO.2226/MDS/2013 THE COMMISSIONER OF INCOME TAX (APPEALS) FURTHER DI RECTED THE ASSESSING OFFICER TO DISALLOW ADMINISTRATIVE EX PENSES ON PROPORTIONATE TO THE INCOME CHARGEABLE TO TAX AND EXEMPT INCOME AND TOTAL INCOME AFTER EXCLUDING EXPENSES LI KE COST OF SERVICES, PROFESSIONAL FEES WHICH ARE SPECIFIC TO T HE PROJECT CONSULTANCY/ADVISORY SERVICES AND RELATABLE TO INC OME CHARGEABLE TO TAX. THE ASSESSEE IS IN APPEAL BEFOR E US. 3. COUNSEL FOR THE ASSESSEE SUBMITS THAT ASSESSEE I S A SUBSIDIARY OF LARSEN & TOUBRO LTD. AND MOST OF THE INVESTMENTS WERE MADE TO INCORPORATE SPECIAL PURPO SE VEHICLES (SPVS) AND THESE SPVS ARE CREATED FOR THE PURPOSE OF IMPLEMENTING ROAD PROJECTS OF NATIONAL HIGHWAY A UTHORITY OF INDIA ON BOT BASIS. COUNSEL FOR THE ASSESSEE SUB MITS THAT THESE SPVS SHALL NOT UNDERTAKE ANY OTHER BUSINESS D URING THE CONCESSION PERIOD. THEREFORE, COUNSEL SUBMITS T HAT INVESTMENTS IN SUBSIDIARIES ARE OUT OF COMMERCIAL E XPEDIENCY AND HENCE SHOULD NOT BE CONSIDERED UNDER SECTION 14 A OF THE ACT SINCE INVESTMENTS WERE NOT MADE FOR EARNING ANY DIVIDEND INCOME. COUNSEL SUBMITS THAT OUT OF TOTAL INVESTMENTS OF ` 441.24 CRORES, FORCED INVESTMENTS AND 4 ITA NO.2226/MDS/2013 INVESTMENTS IN SUBSIDIARIES ARE ` 350.07 CRORES AND ONLY BALANCE OF ` 91.17 CRORES ARE UNFORCED INVESTMENTS. IN OTHER WORDS HE SUBMITS THAT INVESTMENTS MADE IN SPVS OF A BOUT ` 350.07 CRORES CANNOT BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE UNDER SECTION 14A OF THE ACT. COUNSE L FURTHER PLACES RELIANCE ON THE DECISION OF DELHI BENCH OF T HIS TRIBUNAL IN THE CASE OF ACIT VS. M/S. ORIENTAL STRU CTURAL ENGINEERS P.LTD. IN ITA NO.4245/DEL/2011 DATED 2.12 .2011 AND SUBMITS THAT IN SIMILAR CIRCUMSTANCES, THE TRIB UNAL AFFIRMED THE ORDER OF THE COMMISSIONER OF INCOME TA X (APPEALS) IN HOLDING THAT NO EXPENSES AND INTEREST ATTRIBUTABLE TO THE INVESTMENTS MADE BY THE ASSESS EE IN SPVS CAN BE DISALLOWED UNDER SECTION 14A READ WITH RULE 8D BECAUSE IT CANNOT BE TERMED AS EXPENSE/INTEREST INC URRED FOR EARNING EXEMPT INCOME. 4. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTS THE ORDERS OF LOWER AUTHORITIES IN INVOKING SECTION 14A AND DISALLOWING PROPORTIONATE EXPENSES ON INTEREST AND ADMINISTRATIVE EXPENSES INCURRED BY THE ASSESSEE. 5 ITA NO.2226/MDS/2013 5. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHOR ITIES AND THE DECISION RELIED ON BY THE ASSESSEE. THE AS SESSING OFFICER WHILE COMPLETING THE ASSESSMENT DISALLOWED INTEREST EXPENDITURE ON INVESTMENTS FROM WHICH INCOME IS NOT FORMING PART OF TOTAL INCOME UNDER SECTION 14A(1) OF THE A CT TO THE EXTENT OF ` 103,10,547/-. ASSESSING OFFICER FURTHER DISALLOWE D ` 192,35,628/- BEING 0.5% OF AVERAGE INVESTMENTS AP PLYING RULE 8D (2)(III) READ WITH SECTION 14A OF THE ACT. THE COMMISSIONER OF INCOME TAX (APPEALS) EVEN THOUGH HE LD THAT RULE 8D CANNOT BE APPLIED FOR THE ASSESSMENT Y EAR UNDER APPEAL I.E. 2007-08 STILL DIRECTED THE ASSESS ING OFFICER TO DISALLOW THE INTEREST EXPENSES ON THE BORROWED A MOUNT ON PROPORTIONATE BASIS BASED ON THE INVESTMENTS MADE I N SHARES AND MUTUAL FUNDS TO THE TOTAL ASSETS OF THE COMPANY FROM THE BEGINNING OF THE FINANCIAL YEAR. HE ALSO DIRECTED T HE ASSESSING OFFICER TO DISALLOW COMMON ADMINISTRATIVE EXPENSES ON PROPORTIONATE BASIS TO INCOME CHARGEAB LE TO TAX AND EXEMPT INCOME TO TOTAL INCOME AFTER EXCLUDING E XPENSES LIKE COST OF SERVICES, PROFESSIONAL FEES WHICH ARE SPECIFIC TO THE PROJECT CONSULTANCY/ADVISORY SERVICES. WE HAVE PERUSED THE ORDER OF THE DELHI BENCH OF THIS TRIBUNAL RELIE D ON BY THE 6 ITA NO.2226/MDS/2013 ASSESSEE IN THE CASE OF ACIT VS. M/S. ORIENTAL STRU CTURAL ENGINEERS P.LTD. (SUPRA). ON ALMOST SIMILAR CIRCUM STANCES, THE TRIBUNAL HELD THAT NO EXPENSES AND INTEREST AT TRIBUTABLE TO INVESTMENTS MADE BY THE ASSESSEE IN THE SPVS CAN BE DISALLOWED UNDER SECTION 14A READ WITH RULE 8D SI NCE IT CANNOT BE TERMED AS EXPENSES/INTEREST INCURRED FOR EARNING EXEMPT INCOME BY OBSERVING AS UNDER:- 3. APROPOS DISALLOWANCE U/S.14A: IN THIS CASE RETURN OF INCOME HAD FILED ON 30.9.2008 DECLARING AN INCOME OF ` 67,14,94,245/-. THE ASSESSMENT WAS FRAMED U/S.143(3) OF THE IT ACT AT A N INCOME OF ` 68,05,79,170/-. IN THE ASSESSMENT ORDER ASSESSING OFFICER DISALLOWED THE EXPENSES RELATED T O EXEMPT INCOME U/S 14A R.W. RULE 80 AMOUNTING TO ` 35,85,121/-. 4. UPON ASSESSEE'S APPEAL LD. COMMISSIONER OF INCOME TAX (APPEALS) CONSIDERED THE ISSUE AND HELD AS UNDER:- '1 HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT AND ALSO GONE THROUGH THE OBSERVATIONS OF THE ASSESSING OFFICER AS CONTAINED IN THE ASSESSMENT ORDER, AS WELL AS THE JUDICIAL PRONOUNCEMENTS ON THE ISSUE . IT IS SEEN THAT DURING THE YEAR UNDER CONSIDERATION EVEN THOUGH THE APPELLANT COMPANY HAS MADE BORROWINGS FROM BANKS AND FINANCIAL INSTITUTIONS ON WHICH IT HAD PAID INTEREST, INVESTMENTS IN MUTUAL FUNDS AND SHORT TERM FUNDS WERE MADE OUT OF SURPLUS FUNDS AVAILABLE WITH THE APPELLANT FROM TIME TO TIME AS PER THE BANK STATEMENTS PRODUCED. ONLY THE INTEREST OF ` 2,96,731/- WAS PAID ON FUNDS UTILIZED FOR MAKING INVESTMENTS ON WHICH EXEMPTED INCOME WAS RECEIVABLE (AS ADMITTED BY THE APPELLANT DURING THE COURSE OF APPELLATE 7 ITA NO.2226/MDS/2013 PROCEEDINGS) AND HENCE THE SAME IS TREATED AS EXPENSE ATTRIBUTABLE TO EXEMPT INCOME. IN RESPECT OF INVESTMENTS OF ` 6,07,775,000/- MADE IN SUBSIDIARY COMPANIES AS PER DOCUMENTS PRODUCED BEFORE ME, THEY ARE ATTRIBUTABLE TO COMMERCIAL EXPEDIENCY, BECAUSE AS PER SUBMISSION MADE BY THE APPELLANT, IT HAD TO FORM SPECIAL PURPOSE VEHICLES (SPVS) IN ORDER TO OBTAIN CONTRACTS FROM THE NHAI AND THE SPVS SO FORMED ENGAGED THE APPELLANT COMPANY AS CONTRACT TO EXECUTE THE WORKS AWARDED TO THEM (I . E. SPVS) BY THE NHAI . IN ITS PROFIT AND LOSS ACCOUN T FOR TH E Y E A R, THE APPELL A NT HAS SHOWN THE TURN OVE R F R OM E XECUTION OF THESE CONTRACTS AND THEREFORE N O E XP E NSE AND INTEREST ATTRIBUTABLE TO THE INVESTMENTS MADE B Y THE APPELLANT IN THE SPVS CAN BE D I SALLOWED U/S 14A R.W. RULE 80 BECAUSE IT CANNOT BE TERMED AS EXPENSE /INTEREST INCURRED FOR EARNING EXEMPTED INCOME. IN VIEW OF THE FACTS MENTIONED ABOVE:- (I) INTEREST EXPENSES AMOUNTING TO ` 2,96,731/- HAVE BEEN DIRECTLY FOUND TO BE INCURRED FOR EARNING EXEMPT INCOME AND HENCE DISALLOWED U/S 14A. (II) FURTHER, THE COMPANY HAS EARNED DIVIDEND IN RESPECT OF INVESTMENTS MADE AND SOME ADMINISTRATIVE EXPENSES LIKE MANAGEMENT'S SALARY, TELEPHONE, STATIONERY, POSTAGE EXPENSES, ETC . MUST HAVE BEEN INCURRED THEREON. KEEPING IN VIEW THE AFORESAID, I AM OF THE OPINION THAT ADDITION OF ` 40,556/- CALCULATED @ 2% OF THE DIVIDEND EARNED HAS TO BE MADE I.E. 2% OF ` 2,027,812/-. HENCE, ADDITION MADE BY THE ASSESSING OFFICER IS UPHELD TO THE EXTENT OF ` 3,37,287 ( ` 2,96,731/- + ` 40,556/-.) THIS GROUND OF APPEAL IS PARTLY ALLOWED. 5. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPEAL BEFORE US. 8 ITA NO.2226/MDS/2013 6. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT OF THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. 6.1 LD. D EPA RTMENTAL REPRESENTATIVE RELIED UPON THE ORDER OF THE ASSESSING O FF IC E R. 6.2 LD. CO U N SEL OF THE ASSESSEE SUPPORTED THE ORDER OF THE LD. COMMISSION E R OF I NCOME TAX (APPEALS). HE PLACED RELI A NCE UPON THE HON'BLE JUR IS DIC T I O NAL HIGH COURT DECISION IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CI . T. IN ITA NBO. 687/2009 WHEREIN VIDE ORDER DATED 18.11 . 2011 THE HON'BLE JURISDICTIONAL HIGH COURT HAS EXPOUNDED THAT DETERMINATION OF THE AMOUNT OF EXPENDITURE IN RELATI O N TO EXEMPT INCOME UND E R RULE 80 WOULD ONLY COME INTO PLAY WHEN THE ASSESSING OFFICER REJECTS THE CLAIM OF THE ASSESSEE IN THIS REGARD. IT IS FURTHER EXPOUNDED THAT CONDITION PRECEDENT FOR THE ASSESSING OFFICER TO HIMSELF DETERMINE THE AMOUNT OF EXPENDITURE IS THAT HE MUST RECORD HIS DISSATISFACTION WITH THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE OR WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED. IT IS ONLY WHEN THIS CONDITION PRECEDENT IS SATISFIED THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDABLE IN TOTAL INCOME IN THE MANNER INDICATED IN SUB-RULE (2) OF RULE 80 OF THE SAID RULES . 6 . 3 WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AND PERU S ED THE RECORDS . WE FIND THAT LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS GIVEN A FINDING THAT ONLY INTEREST OF ` 2,96,731/- WAS PAID ON FUNDS UTILIZED FOR MAKING INVESTMENTS ON WHICH EXEMPTED INCOME WAS RECEIVABLE. FURTHER, LD . COMMISSIONER OF INCOME TAX (APPEALS) HAS OBSERVED THAT IN RESPECT OF INVESTMENT OF ` 6,07,775,000/- MADE IN S UBSIDIARY COMPANIES AS PER DOCUMENTS PRODUCED BEFORE HIM, THEY ARE ATTRIBUTABLE TO COMMERCIAL EXPEDIENCY, BECAUSE AS PER SUBMISSION MADE BY THE ASSESSEE, IT HAD TO FORM SPECIAL PURPOSE VEHICLES (SPVS) IN ORDER 9 ITA NO.2226/MDS/2013 TO OBTAIN CONTRACTS FROM THE NHAI AND THE SPVS SO FORMED ENGAGED THE ASSESSEE COMPANY AS CONTRACT TO EXECUTE THE WORKS AWARDED TO THEM (I . E . SPVS) BY THE NHAI . IN ITS PROFIT AND LOSS ACCOUNT FOR THE YEAR, THE ASSESSEE HAS SHOWN THE TURNOVER FROM EXECUTION OF THESE CONTRACTS AND THEREFORE NO EXPENSE AND INTEREST ATTRIBUTABLE TO THE INVESTMENTS MADE BY THE APPELLANT IN THE SPVS CAN BE DISALLOWED U/S 14A R . W. RULE 8D BECAUSE IT CANNOT BE TERMED AS EXPENSE /INTEREST INCURRED FOR EARNING EXEMPTED INCOME. UNDER THE CIRCUMSTANCES, LD. COMMISSIONER OF INCOME TAX (APPEALS) IS CORRECT IN HOLDING THAT DISALLOWANCE O F A FURTHER SUM ` 40,556/- CALCULATED @ 2% OF THE DIVIDEND EARNED IS SUFFICIENT . UNDER THE CIRCUMSTANCES, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) , HENCE, WE UPHOLD THE SAME. 6. AS COULD BE SEEN FROM THE ABOVE THE TRIBUNAL AFF IRMED THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL S) WHO HAS EXCLUDED THE INVESTMENTS MADE BY THE ASSESSEE I N SPVS FOR THE PURPOSE OF DISALLOWANCE UNDER SECTION 14A O F THE ACT. THE TRIBUNAL ALSO AFFIRMED THE DECISION OF THE COMM ISSIONER OF INCOME TAX (APPEALS) IN HOLDING THAT ON THE BALA NCE INVESTMENTS THE DIVIDEND INCOME EARNED SHALL BE CON SIDERED FOR DISALLOWANCE AT 2% PLUS INTEREST EXPENSES DIRE CTLY FOUND TO BE INCURRED FOR EARNING SUCH EXEMPT INCOME FROM BALANCE INVESTMENTS. RESPECTFULLY FOLLOWING THE SAID DECISI ON, WE DIRECT THE ASSESSING OFFICER TO RECOMPUTE THE DISAL LOWANCE UNDER SECTION 14A BY EXCLUDING THE INVESTMENTS MADE IN 10 ITA NO.2226/MDS/2013 SPVS AND CONSIDER ONLY THE BALANCE INVESTMENTS FOR THE PURPOSE OF DISALLOWANCE UNDER SECTION 14A OF THE AC T. THE ASSESSING OFFICER SHALL CALCULATE DISALLOWANCE UNDE R SECTION 14A THE INTEREST EXPENSES DIRECTLY INCURRED FOR EA RNING EXEMPT INCOME ON THE INVESTMENTS OTHER THAN THE INVESTMENTS MADE IN SPVS PLUS 2% OF THE DIVIDEND IN COME EARNED ON THE INVESTMENTS OTHER THAN INVESTMENTS MA DE IN SPVS AFTER VERIFYING THE TOTAL INVESTMENTS MADE BY THE ASSESSEE AND AFTER PROVIDING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 7. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON FRIDAY, THE 2 1 ST DAY OF NOVEMBER, 2014 AT CHENNAI. SD/- SD/- ( . ) ( ( *+ ) ( A.MOHAN ALANKAMONY ) ( CHALLA NAGENDR A PRASAD ) - / ACCOUNTANT MEMBER * - / JUDICIAL MEMBER * /CHENNAI, / /DATED 21 ST NOVEMBER, 2014 SOMU 12 32 /COPY TO: 1. APPELLANT 2. RESPONDENT 3. 4 () /CIT(A) 4. 4 /CIT 5. 2 7 /DR 6. /GF .