L&T Urban Infrastructure Limited, CHENNAI V. ACIT, CHENNAI

ITA 2335/CHNY/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8267 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 02-08-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 28-12-2015
• Court: TRIBUNAL
• Department Lawyers: M M BHUSARI
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Earning of tax free income; Commercial expediency
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL B BENCH, CHENNAI . , . , BEFORE SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER & SHRI DUVVURU R L REDDY , JUDICIAL MEMBER ./ I T.A. NO. 2 3 35 /MDS/201 5 / ASSESSMENT YEAR :20 07 - 08 M/S. L&T URBAN INFRASTRUCTURE LTD. (PRESENTLY KNOWN AS L&T REALTY LTD.), POST BOX NO. 979, MOUNT POONAMALLEE ROAD, MANAPAKKAM, CHENNAI 600 08 9 . [PAN: A A BCL1985B ] VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(4), CHENNAI 34 . ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : SHRI R. VIJAYARAGHAVAN , ADVOCATE / RESPONDENT BY : SHRI M.M. BHUSARI , CIT / DATE OF HEARING : 0 4 . 0 8 .201 6 / DATE OF P RONOUNCEMENT : 19 . 1 0 .201 6 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE LD. COMMISSIONER OF INCOME TAX ( APPEALS ) 8 , CHENNAI , DATED 30 . 0 9 .20 1 5 RELE VANT TO THE ASSESSMENT YEAR 20 07 - 08 . THE ASSESSEE HAS RAISED TWO EFFECTIVE GROUND S VIZ., (I) THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE MADE UNDER SECTION 14 A OF THE INCOME TAX ACT, 1961 [ ACT IN SHORT] AND (II) THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF I.T.A. NO . 23 35 /M/ 15 2 EXPENSES SHOWN AS COST OF SERVICES BEING REIMBURSEMENT OF SALARY EXPENSE OF MANAGERIAL PERSONNEL TO ITS GROUP ENTITIES. 2. BRIEF FAC TS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF PROJECTS IT/ITES PARKS/SEZ, COMMERCIAL & RESIDENTIAL TOWNSHIPS. THE ASSESSEE FILED ITS RETURN OF INCOME ON 31.10.2007 DECLARING LOSS OF .4,55,18,138/ - . THE RETURN FILED BY THE ASSESSEE WAS PROCESSED UNDER SECTION 143(1) OF THE ACT ON 05.03.2009. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) OF THE ACT WAS ISSUED ON 11.09.2009. IN RESPONSE THERETO, THE ASSESSEE HAS FILED ALL DETAILS AS CA LLED FOR. THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE ACT BY RESTRICTING THE LOSS TO . 32,31,086/ - AFTER MAKING VARIOUS ADDITIONS. 3. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A). AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AS WELL AS CONSIDERING THE FACTS OF THE CASE, THE APPEAL FILED BY THE ASSESSEE WAS PARTL Y ALLOWED BY THE LD. CIT(A). 4. ON BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL AND RAISED TWO EFFECTIVE GROUNDS. WITH REGARD TO THE FIRST ISSUE OF APPLICATION OF PROVISIONS OF SECTION 14A OF THE ACT, THE LD. COUNSEL FOR THE ASSESSEE H AS STRONGLY CONTENDED THAT THERE WAS NO DIRECT EXPENSES INCURRED BY THE I.T.A. NO . 23 35 /M/ 15 3 ASSESSEE FOR EARNING INCOME FROM INVESTMENTS AND HENCE THE PROVISIONS OF SECTION 14A OF THE ACT HAS NO APPLICATION. MOREOVER, THE INVESTMENTS IN SUBSIDIARIES WERE NOT MADE WITH THE INT ENTION TO EARN EXEMPT INCOME AND THAT THEY WERE ONLY IN THE NATURE OF STRATEGIC INVESTMENTS. THUS, THE LD. COUNSEL FOR THE ASSESSEE HAS PLEADED THAT THE DISALLOWANCE MADE SHOULD BE DELETED. 5. ON THE OTHER HAND, THE LD. DR STRONGLY SUPPORTED THE ORDER PASSED BY THE AUTHORITIES BELOW. HE HAS SUBMITTED THAT EVEN THOUGH RULE 8D IS APPLICABLE FROM THE ASSESSMENT YEAR 2008 - 09 ONWARDS, APPLICATION OF PROVISIONS OF 14A OF THE ACT ARE 'CONSTITUTIONALLY VALID' AND PROVISIONS OF S ECTION 14A ARE STILL APPLICABLE F OR EARLIER ASSESSMENT YEARS AND THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE EXPENDITURE BY ADOPTING A REASONABLE BASIS OR METHOD . THEREFORE, THE ASSESSING OFFICER HAS RIGHTLY MADE DISALLOWANCE TOWARDS INTEREST PAYMENT ON BORROWED FUNDS, WHICH WERE INV ESTED IN EQUITY SHARES AND PLEADED THAT THE SAME SHOULD BE CONFIRMED. 6. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE ASSESSEE COMPANY HELD SHARE CAPITAL OF .4.74 CRORES AND UNSECURED LOANS OF .484.47 CRORES. THE INVESTMENT MADE IN EQUITY SHARES OF THE RELATED COMPANIES AND MUTUAL FUNDS WAS .40.86 CRORES . FURTHER, A SUM OF .455,42,27,129/ - HAS BEEN I.T.A. NO . 23 35 /M/ 15 4 GIVEN AS LOANS AND ADVANCES TO ITS RELATED COMPANIES. FURT HER, IN THE PROFIT AND LOSS ACCOUNT, THE ASSESSEE HAS CLAIMED INTEREST AND FINANCE CHARGES OF .3.23 CRORES PAYABLE ON THE UNSECURED LOANS OF .484.47 CRORES, WHICH WERE UTILIZED AS INVESTMENT IN SHARES, MUTUAL FUND AND LOANS & ADVANCES. AGAINST THE SUBMIS SIONS OF THE ASSESSEE DATED 06.11.2009, THE ASSESSING OFFICER HAS OBSERVED THAT THE LIST OF PROJECTS GIVEN BY THE ASSESSEE AS ITS PROJECTS ARE FACTUALLY NOT ITS OWN PROJECTS, BUT THEY ARE THE PROJECTS UNDERTAKEN BY SEPARATE COMPANIES, WHICH WERE SEPARATE L EGAL ENTITIES BY LAW. SINCE THE ASSESSEE HAS INVESTED OR GIVEN LOAN/ADVANCE, THE PROJECT OF THESE COMPANIES WILL NOT BE TRANSFERRED TO THE ASSESSEE, AS IT CLAIMS. THE ASSESSING OFFICER HAS FURTHER OBSERVED THAT THE RESIDENTIAL PROJECT AT SRIPERUMBUDUR WAS THE ONLY PROJECT OF THE ASSESSEE WHICH WAS ALSO IN IMPLEMENTATION PHASE. BEFORE THE ASSESSING OFFICER, THE ASSESSEE HAS ARGUED THAT BECAUSE OF COMMERCIAL EXPEDIENCY OF THE ASSESSEE TO FLOAT SPVS, THE ASSESSEE FLOATED SUBSIDIARY COMPANIES AND INVESTED IN TH E EQUITY SHARES OF SUCH SUBSIDIARY COMPANIES. THE ABOVE CLAIM OF THE ASSESSEE CANNOT SURVIVE BECAUSE COMMERCIAL EXPEDIENCY CAN BE CLAIMED ONLY IN THE EXISTING BUSINESS, WHEREAS, IN THE CASE OF THE ASSESSEE THE QUESTION IS THE BUSINESS ITSELF. HE FURTHER OB SERVED THAT ON ONE HAND THE ASSESSEE CLAIMS THAT IT IS INVOLVED IN THE BUSINESS OF INFRASTRUCTURE DEVELOPMENT PROJECTS THROUGH ITS TAX AUDIT REPORT AND MOA, BUT ACTUALLY, NO ACTIVITIES HAS BEEN DONE BY THE ASSESSEE IN THIS REGARD IN THE PREVIOUS YEAR RELEV ANT TO THE I.T.A. NO . 23 35 /M/ 15 5 ASSESSMENT YEAR EXCEPT IMPLEMENTATION OF RESIDENTIAL PROJECT AT SRIPERUMBUDUR. ON THE OTHER HAND, THE FUND RAISED BY THE ASSESSEE IN THE NAME OF ITS BUSINESS HAS FULLY BEEN DIVERTED TO OTHER PURPOSES LIKE INVESTMENT IN SHARES, MUTUAL FUND AND LO ANS TO ITS GROUP CONCERNS WHICH ARE ACTUALLY INVOLVED IN THE BUSINESS OF DEVELOPMENT OF INFRASTRUCTURE PROJECTS AND EARNED EXEMPT INCOME . UNDER THESE FACTS AND CIRCUMSTANCES, THE ASSESSEE ATTAINS THE STATUS OF THE FINANCING COMPANY THAN THE ACTUAL BUSINESS AS CLAIMED BY IT. FURTHER, EVEN IF SPVS WERE ASSUMED TO BE THRUST UPON THE ASSESSEE, IT NEED NOT HAVE FLOATED SPVS ONLY IN THE FORM OF COMPANIES ALONE. ONCE A COMPANY HAS BEEN REGISTERED WITH ROC AND GETS A PAN AS PER ACTS CONCERNED, IT BECOMES A SEPARATE LEGAL ENTITY AND THE BUSINESS OF THAT CONCERN CANNOT BE CLAIMED AS THE BUSINESS OF THE ANOTHER ENTITY SINCE IT HAD INVESTED IN THE SHARES OR GIVEN LOAN FOR WORKING CAPITAL . IF AT ALL IT IS THE CLAIM OF THE ASSESSEE, THEN WHAT EVER RECEIPTS IN THE HANDS OF ALL THESE SEPARATE LEGAL ENTITIES OR THE SO CALLED SPVS WILL BECOME THE RECEIPTS IN THE HANDS OF THE ASSESSEE WHICH WILL HAVE A TELESCOPIC EFFECT. WITH THE ABOVE REASONING , THE ASSESSING OFFICER HAS HELD THAT THE INTEREST ATTRIBUTABLE TO THE BORROWED LOAN UTILIZED FOR INVESTMENT IN EQUITY SHARES IS NOT ALLOWABLE EITHER UNDER SECTION 36(1)(III) OR UNDER SECTION 14A OF THE ACT. 7. AFTER CONSIDERING VARIOUS CASE LAW, THE LD. CIT(A) CONFIRMED THE ORDER OF THE ASSESSING OFFICER . IN THE GROUNDS OF APPEAL, T HE ASSESSEE HAS I.T.A. NO . 23 35 /M/ 15 6 CONTEN DED THAT THE INVESTMENTS IN SUBSIDIARIES WERE NOT MADE WITH THE INTENTION TO EARN EXEMPT INCOME AND THAT THEY WERE ONLY IN THE NATURE OF STRATEGIC INVESTMENT . WE ARE OF THE VIEW THAT I N TRUE SENSE, STRATEGIC INVESTMENTS ARE OFTEN USED T O RAISE CAPITAL AND CREDIBILITY FOR NEW COMPANIES WHICH ARE STRUGGLING TO MAKE THEIR WAY IN THE MARKET. IN THE INSTANT CASE, BY MAKING INVESTMENTS IN THE SUBSIDIARIES, THE ASSESSEE HAS EARNED EXEMPT INCOME. MOREOVER, THE ASSESSEE CLAIMS THAT IT HAS INVOLVE D IN THE BUSINESS OF INFRASTRUCTURE DEVELOPMENT PROJECTS THROUGH ITS TAX AUDIT REPORT AND MEMORANDUM OF ASSOCIATION . GENERALLY, L ARGER COMPANIES MAKE STRATEGIC INVESTMENTS IN SMALLER ONES FOR AN ASSORTMENT OF REASONS. FOR EXAMPLE, A BIG COMPANY MIGHT INVES T IN A SMALLER COMPANY WHICH MAKES SIMILAR PRODUCTS, OR IN A SMALL COMPANY WHICH WILL EVENTUALLY BECOME A CLIENT OF THE BIG COMPANY , BUT ACTUALLY, NO ACTIVITY HAS BEEN CARRIED OUT BY THE ASSESSEE IN THIS REGARD IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSME NT YEAR EXCEPT IMPLEMENTATION OF RESIDENTIAL PROJECT AT SRIPERUMBUDUR. UNDER THE ABOVE FACTS AND CIRCUMSTANCES, IT CANNOT BE SAID THAT THE INVESTMENTS MADE IN SUBSIDIARIES ARE OF STRATEGIC INVESTMENTS. THEREFORE, THE ABOVE CLAIM OF THE ASSESSEE IS REJECTED . 8. W ITH REGARD TO CONFIRMATION OF DISALLOWANCE UNDER SECTION 14A OF THE ACT IN COMPUTING INCOME UNDER NORMAL PROVISIONS , THE LD. COUNSEL FOR THE ASSESSEE HAS ARGUED THAT RULE 8D IS NOT APPLICABLE TO THE ASSESSMENT YEAR I.T.A. NO . 23 35 /M/ 15 7 UNDER CONSIDERATION. WE FIND FORC E IN THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE. THE HON BLE MUMBAI HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. DCIT 328 ITR 81 HAS HELD THAT RULE 8D CANNOT BE APPLIED RETROSPECTIVELY BUT ONLY FROM THE ASSESSMENT YEAR 2008 - 09. HOWEVER, IT WAS ALSO HELD THAT APPLICATION OF PROVISIONS OF 14A ARE 'CONSTITUTIONALLY VALID' AND PROVISIONS OF S ECTION 14A ARE STILL APPLICABLE FOR EARLIER ASSESSMENT YEARS AND THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE EXPENDITURE BY ADOPTING A REASONABLE BA SIS OR METHOD . IN THIS CASE, THE ASSESSEE HAS INVESTED THE ENTIRE UNSECURED LO ANS OF .484.47 CRORES IN SHARES, MUTUAL FUND , ETC., AND THEREFORE, THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT NO EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE FOR EARNING INCOME FROM INVESTMENTS CANNOT BE ACCEPTED . EVEN THOUGH THE PROVISIONS OF RULE 8D ARE NOT APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION SINCE THEY HAVE BEEN INTRODUCED W.E.F. 24. 0 3. 20 08 , WE ARE OF THE CONSIDERED OPINION THAT IN VIEW OF THE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF SIMPSON & CO. L TD. IN T/.C. NO. 2621 OF 2006 DATED 15.10.2012, AN ESTIMATE OF 2% OF GROSS INCOME FROM INVESTMENTS RECEIVED MAY BE DISALLOWED TOWARDS EXPENDITURE FOR EARNING SUCH INCOME. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND DIRECT THE AS SESSING OFFICER TO DISALLOW 2% OF GROSS INCOME FROM INVESTMENTS TOWARDS EXPENDITURE FOR EARNING SUCH INCOME. THUS, THE GROUND RAISED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. I.T.A. NO . 23 35 /M/ 15 8 9 . THE NEXT GROUND RAISED BY THE ASSESSEE IS WITH REGARD TO D ISALLOWANCE OF COST OF SERVICES PAID WITHOUT TDS. FROM THE PROFIT AND LOSS ACCOUNT, THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HAS CLAIMED A SUM OF .79,87,718/ - TOWARDS COST OF SERVICES TO THE ULTIMATE HOLDING COMPANY [L&T LTD.] AND THE HOLDING COMPANY [L&T IDPL]. BEFORE THE ASSESSING OFFICER T HE ASSESSEE HAS SUBMITTED THAT THE SENIOR MANAGERIAL PERSONNEL OF L&T UIL ARE ON THE PAYROLL OF L&T LIMITED [THE ULTIMATE HOLDING COMPANY]. THE SALARY OF THESE EMPLOYEES WAS PAID BY L&T LTD. THE L&T LTD., IN TURN, RECHARGES THE SAID AMOUNT TO THE GROUP COM PANIES. THE AMOUNT CHARGED BY L&T DURING THE FINANCIAL YEAR 2006 - 07 HAS BEEN BOOKED UNDER THE HEAD COST OF SERVICES . IT WAS FURTHER SUBMITTED THAT REIMBURSEMENT WAS COST RECHARGE ARISING OUT OF EXPENSES INCURRED B Y ONE PERSON ON BEHALF OF THE OTHER AND NOT FOR PROVISION OF SERVICES. THE SAID EXPENDITURE WAS PURELY IN THE NATURE OF A REIMBURSEMENT OF COSTS AND CONSEQUENTLY, THERE WAS NO INCOME ACCRUING TO L&T LTD. GIVEN THAT NO INCOME STREAM ARISES TO L&T AS A RESUL T OF THE REIMBURSEMENT OF EXPENSES, THE SAID AMOUNT HAS BEEN PAID WITHOUT DEDUCTING TAX AT SOURCE. HOWEVER, BEFORE THE ASSESSING OFFICER, THE ASSESSEE HAS NOT FURNISHED ANY RELEVANT DOCUMENT IN RELATION TO THE ABOVE CLAIM LIKE CONTRACT AGREEMENT IF ANY, DE BIT NOTES RAISED, DETAILS OF CALCULATION OF THE COST AND THE PROOF OF PAYMENT, ETC. ALSO THEY WERE ASKED TO CONFIRM WHETHER TAX HAD BEEN DEDUCTED FOR THESE AMOUNTS AS PER THE PROVISIONS OF LAW WHILE MAKING THE PAYMENTS TO PARTIES CONCERNED . BUT THE ASSESSE E I.T.A. NO . 23 35 /M/ 15 9 COULD NOT FURNISH ANY DOCUMENTARY EVIDENCE TO SUBSTANTIATE ITS CLAIM BEFORE THE ASSESSING OFFICER. ACCORDINGLY, THE ASSESSING OFFICER DISALLOWED THE COST OF S ERVICES PAID TO L&T LTD. AT .79,812,718/ - . 10 . THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A). SINCE THE ASSESSEE COULD NOT FURNISH ANY DOCUMENTARY EVIDENCE TO ITS CLAIM, THE LD. CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 1 1 . BEFORE US, BY FILING COPY OF THE DEBIT NOTES, JOURNAL VOUCHER, ETC., THE LD. COUNSEL FOR THE ASSESSEE HAS PLEADED TO DELETE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AGAINST THE GENUINE CLAIM OF THE ASSESSEE. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT THE ASSESSEE HAS NOT FURNISHED THE SAID DOCUMENTS BEFORE THE AUTHORITIES BELOW. 1 2 . WE HAVE HEARD BOTH SIDES AND PERUSED THE DETAILS FILED BEFORE US. IN THIS CASE, THE ASSESSEE HAS NOT FURNISHED THE RELEVANT DOCUMENTS IN RELATION TO THE ABOVE CLAIM LIKE CONTRACT AGREEMENT , IF ANY, DEBIT NOTES RAISED, DETAILS OF CALCULATION OF THE COST AND THE PROOF OF PAYMENT, ETC. AND ALSO THEY WERE ASKED TO CONFIRM WHETHER TAX HAS BEEN DEDUCTED FOR THESE AMOUNTS AS PER THE PROVISIONS OF LAW WHILE MAKING THE PAYMENTS TO THE PARTIES CONCERNED. THEREFORE, THE ASSESSING OFFICER DISALLOWED THE SAME. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE HAS FILED COPIES OF DEBIT NOTES RAISED AND JOURNAL VOUCHERS, ETC. HOWEVER, THE ASSESSEE HAS NOT FI LED THE I.T.A. NO . 23 35 /M/ 15 10 SAME BEFORE THE AUTHORITIES BELOW. UNDER THESE FACTS AND CIRCUMSTANCES, WE REMIT THE MATTER BACK TO THE ASSESSING OFFICER TO VERIFY THE DETAILS FILED BEFORE THE TRIBUNAL AND DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. THE ASSESSEE IS ALSO DIRECTED TO FURNISH ALL DETAILS AS MAY BE REQUIRED FOR VERIFICATION. 1 3 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THE 19 TH OCTOBER , 2 016 AT CHENNAI. SD/ - SD/ - (A. MOHAN ALANKAMONY ) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 19 . 1 0 .201 6 VM/ - / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CI T(A) , 4. / CIT , 5. / DR & 6. / GF.