Spandana Sphoorty Financial Limited, Hyderabad V. Addl.CIT., Range-3, Hyderabad, Hyderabad

ITA 24/HYD/2015

• Counselvise Citation: 2422514 RSA 2015
• Duration Of Justice: 7 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 13-08-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 05-01-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: GOPINATH
• Keywords: Earning of tax free income; Proportionate interest; Retrospective amendment
• Section: 43B; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER S.NO. ITA NO. AY APPELLANT RESPONDENT 1. 24/H/15 2010-11 SPANDANA SPHOORTY FINANCIAL LTD., HYDERABAD. ADDL. COMMISSIONER OF INCOME-TAX, RANGE 3, HYDERABAD. 2. 1928/H/14 2010-11 DY. COMMISSIONER OF INCOME-TAX, CIRCLE 3(2), HYD. SPANDANA SPHOORTY FINANCIAL LTD., HYDERABAD. ASSESSEE BY : SHRI G.V.N. HARI REVENUE BY : SHRI GOPINATH DATE OF HEARING 13-08-2015 DATE OF PRONOUNCEMENT 26-08-2015 O R D E R PER SAKTIJIT DEY, J.M.: THESE CROSS APPEALS BY ASSESSEE AND THE DEPARTMENT ARE AGAINST ORDER DATED 24/10/2014 OF LD. CIT(A)IV, HYD ERABAD FOR AY 2010-11. 2. THE ONLY ISSUE RAISED BY ASSESSEE IN ITS APPEAL RELATES TO DISALLOWANCE OF AN AMOUNT OF RS. 73,76,416 U/S 14A OF THE ACT. 3. BRIEFLY THE FACTS ARE, ASSESSEE A COMPANY IS ENG AGED IN THE BUSINESS OF MICRO FINANCE. FOR THE AY UNDER CONSIDE RATION, ASSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 319,56,36,810. IN COURSE OF ASSESSMENT PROCEEDING, AO NOTICED THAT DURING THE RELEVANT PY ASSESSEE HAS MADE INVES TMENT IN MUTUAL FUNDS, WHICH HAS RESULTED IN DIVIDEND INCOME WHICH IS ITA NOS. 24/H/15 & 1928/H/14 SPANDANA SPHOORTY FINANCIAL LTD., HYD. 2 EXEMPT FROM TAX. HE NOTICED THAT DURING THE PY, ASS ESSEE HAD PURCHASED UNITS FROM MUTUAL FUNDS WORTH RS. 5472,44 ,86,801 ON DIFFERENT DATES BEGINNING FROM APRIL09 TO MARCH09 AND HAS SOLD ALL THE UNITS INCLUDING OPENING BALANCE WORTH OF RS. 29 5,05,66,474 ON DIFFERENT DATES PRIOR TO 31/03/2010 FOR A TOTAL SAL E CONSIDERATION OF RS. 5771,02,72,551. ASSESSEE DURING THE YEAR HAD EA RNED DIVIDEND INCOME OF RS. 3,52,19,276, WHICH HAS BEEN CLAIMED A S EXEMPT FROM TAX. AO OBSERVED THAT, THOUGH, INTEREST EXPENDITURE RELATING TO INVESTMENT GIVING RISE TO EXEMPT INCOME WAS DISALLO WED U/S 36(1)(III), BUT, ADMINISTRATIVE EXPENDITURE INCURRE D FOR EARNING DIVIDEND INCOME HAS TO BE DISALLOWED AS PER THE PRO VISIONS OF RULE 8D. SINCE HE HAS ALREADY DISALLOWED INTEREST EXPEND ITURE RELATING TO INVESTMENT IN MUTUAL FUNDS U/S 36(1)(III), HE RESTR ICTED THE DISALLOWANCE U/S 14A READ WITH RULE 8D(2)(III) TO 0 .5% OF THE AVERAGE VALUE OF INVESTMENT WHICH WAS WORKED OUT TO RS. 73 ,76,416. BEING AGGRIEVED OF SUCH DISALLOWANCE, ASSESSEE PREFERRED APPEAL BEFORE CIT(A). 4. THOUGH, IN COURSE OF HEARING BEFORE LD. CIT(A), ASSESSEE CONTENDED THAT PROVISIONS OF RULE 8D CANNOT BE APPL IED IN A MECHANICAL WAY AND UNLESS THERE IS NEXUS BETWEEN TH E EXPENDITURE INCURRED AND INVESTMENT MADE NO DISALLOWANCE CAN BE MADE, BUT, LD. CIT(A) DID NOT FIND MERIT IN SUCH SUBMISSIONS O F ASSESSEE. LD. CIT(A) FOLLOWING THE DECISION OF ITAT, HYDERABAD IN ASSESSEES OWN CASE FOR AY 2009-10, HELD THAT DISALLOWANCE TO BE M ADE UNDER RULE 8D(2)(II) DOES NOT REQUIRE ESTABLISHMENT OF ANY NE XUS BETWEEN THE EXPENDITURE AND THE INVESTMENTS MADE FOR EARNING EX EMPT INCOME. ACCORDINGLY, SHE CONFIRMED THE DISALLOWANCE OF RS. 73,76,416. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIALS ON RECORD. LD. COUNSELS FOR BOTH THE PARTIES AGREED BE FORE US THAT THE ISSUE IN DISPUTE IS SQUARELY COVERED BY THE DECISIO N OF THE ITAT IN ASSESSEES OWN CASE FOR AY 2009-10. ON PERUSAL OF T HE ORDER DATED 10/10/2014 IN ITA NO. 1653/HYD/12 OF THE COORDINATE BENCH, IT IS ITA NOS. 24/H/15 & 1928/H/14 SPANDANA SPHOORTY FINANCIAL LTD., HYD. 3 SEEN, THE TRIBUNAL SUSTAINED THE DISALLOWANCE UNDE R RULE 8D(2)(II) BY OBSERVING AS UNDER: HOWEVER, SO FAR AS DISALLOWANCE OF RS. 74,12,030 @ 0.5% ON THE AVERAGE VALUE OF INVESTMENT UNDER RULE 8D(2)(III) IS CONCERNED, WE ARE OF THE VIEW THAT THE SAME IS IN ORDER. READING OF THE PROVISION CONTAINED U/S 14A AND MORE SPECIFICALLY SUB-SECTION(3) OF SE CTION 14A READ WITH RULE 8D(2)(III) MAKES IT CLEAR, EVEN WHERE THE ASSESSE E CLAIMS THAT HE HAS NOT INCURRED ANY EXPENDITURE FOR EARNING EXEM PT INCOME, DISALLOWANCE OF EXPENDITURE DEEMED TO HAVE BEEN IN CURRED HAS TO BE WORKED OUT @ 0.5% ON THE AVERAGE VALUE OF INVE STMENTS. AS THE AO HAS CORRECTLY COMPUTED DISALLOWANCE IN TERMS WITH RULE 8D(2)(III), THE SAME DESERVES TO BE UPHELD. ACCORDINGLY, WE SUST AIN THE ADDITION OF RS. 74,12,030 OUT OF THE TOTAL ADDITION OF RS. 14,23 ,29,696 MADE U/S 14A BY THE AO. FACTS BEING MATERIALLY SAME, RESPECTFULLY FOLLOWING THE VIEW EXPRESSED BY THE COORDINATE BENCH IN ASSESSEES OWN CASE FOR PRECEDING AY, WE UPHOLD THE ORDER OF LD. CIT(A) ON THIS ISSUE. GROUNDS RAISED ARE THEREFORE DISMISSED. 6. IN THE RESULT, APPEAL OF ASSESSEE IS DISMISSED. ITA NO. 1928/HYD/2014 BY REVENUE 7. THE EFFECTIVE GROUNDS RAISED BY THE DEPARTMENT R EAD AS UNDER: 2. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ASS ESSEE'S CONTRIBUTION TOWARDS.ESI ARE ALLOWABLE AS DEDUCTIO N, IF THE SAME ARE PAID WITHIN THE DUE DATE FOR FILING RETUR N OF INCOME OBVIOUS OF THE FACT THAT THE RELEVANT 'DUE DATE' A S SPECIFIED UJS 36(1)(VA) FOR REMITTANCE OF EMPLOYEE'S CONTRIBUTIO NS IS THE 'DUE DATE' IN THE RELEVANT FUND AND ARE NOT GOVER NED BY THE PROVISIONS OF SECTION 43B SO AS TO EQUATE EMPLOYEE 'S CONTRIBUTION WITH EMPLOYER'S CONTRIBUTION. 3. THE LEARNED CIT(A) OUGHT NOT TO HAVE DELETED TH E DISALLOWANCE OF INTEREST EXPENDITURE ON LOANS BROU GHT FOR THE PURPOSE OF BUSINESS BUT UTILIZED IN INVESTMENTS, A SSUMING THAT THE INVESTMENTS WERE MADE OUT OF THE INTEREST FREE FUNDS, WHEN NO SUCH NEXUS WAS ESTABLISHED BY THE ASSESSEE . ITA NOS. 24/H/15 & 1928/H/14 SPANDANA SPHOORTY FINANCIAL LTD., HYD. 4 8. AS FAR AS GROUND NO. 2 IS CONCERNED, FACTS ARE, DURING THE ASSESSMENT PROCEEDING, AO NOTICED THAT THOUGH ASSES SEE DURING THE YEAR HAS COLLECTED RS. 16,24,219 TOWARDS ESI CO NTRIBUTION FROM THE EMPLOYEES, BUT, AN AMOUNT OF RS. 7,82,156 WAS D EPOSITED BEYOND PRESCRIBED DUE DATE. HE, THEREFORE, DISALLOW ING THE AMOUNT OF RS. 7,82,156 ADDED BACK TO THE INCOME OF ASSESSE E FOR THE YEAR UNDER CONSIDERATION. 9. ASSESSEE CHALLENGING THE DISALLOWANCE BEFORE CIT (A) CONTENDED THAT AS EMPLOYEES CONTRIBUTION HAD BEEN P AID BEFORE DUE DATE OF FILING OF RETURN U/S 139(1), NO DISALLOWANC E OF THE AMOUNT CAN BE MADE. IN THIS CONNECTION, HE RELIED UPON A N UMBER OF DECISIONS OF HIGH COURT AS WELL AS ITAT. LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE IN THE LIGHT OF THE JUDICIAL PRECEDENTS PLACED BEFORE HER OBSERVED, AF TER OMISSION OF THE SECOND PROVISO TO SECTION 43B OF THE ACT BY THE FINANCE ACT, 2003 WITH RETROSPECTIVE EFFECT, ANY CONTRIBUTION MA DE BY EMPLOYEES TOWARDS PF AND ESI, IF REMITTED TO THE GOVT. ACCOUN T BEFORE DUE DATE OF FILING OF RETURN U/S 139(1), WILL BE AN ALL OWABLE DEDUCTION. ACCORDINGLY, SHE DELETED THE ADDITION MADE BY AO. 10. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IALS ON RECORD. AS COULD BE SEEN, THE ONLY GROUND FOR DISAL LOWANCE BY AO IS, ASSESSEE HAS NOT REMITTED A PART OF THE EMPLOYE ES CONTRIBUTION TO ESI WITHIN THE PRESCRIBED DUE DATE AS PROVIDE U/ S 36(1)(VA). HOWEVER, IT IS TO BE OBSERVED THAT DIFFERENT HIGH C OURTS WHILE CONSIDERING IDENTICAL NATURE OF DISPUTE HAVE HELD T HAT EMPLOYEES CONTRIBUTION TO PF AND ESI, IF, HAVE BEEN REMITTED TO GOVT. ACCOUNT WITHIN THE DUE DATE OF FILING OF RETURN U/S 139(1), THE SAME WILL BE AN ALLOWABLE DEDUCTION. REFERENCE IN THIS REGARD CAN B E MADE TO THE FOLLOWING DECISIONS: 1. CIT VS. NIPSO POLYFABRIKS LTD., 350 ITR 327 (HP ) 2. CIT VS. GHATGE PATIL TRANSPORT LTD., [2014] 368 ITR 749 (BOM.) ITA NOS. 24/H/15 & 1928/H/14 SPANDANA SPHOORTY FINANCIAL LTD., HYD. 5 IN VIEW OF THE AFORESAID, WE DO NOT FIND ANY INFIRM ITY IN THE ORDER OF LD. CIT(A) IN DELETING THE ADDITION MADE BY AO. THE GROUND IS, THEREFORE, DISMISSED. 11. THE NEXT ISSUE RAISED IN GROUND NO. 3 RELATES T O DELETION OF ADDITION MADE BY AO ON ACCOUNT OF DISALLOWANCE OF I NTEREST EXPENDITURE U/S 36(1)(III). 12. BRIEFLY THE FACTS ARE, DURING THE ASSESSMENT PR OCEEDING, AO NOTED THAT ASSESSEE IN THE RELEVANT PY HAS MADE HUG E INVESTMENT IN MUTUAL FUNDS. HE OBSERVED THAT THE MAIN BUSINESS OF ASSESSEE IS MICRO FINANCING I.E. LENDING MONEY TO POOR AND NEED Y, WHEREAS, THE INVESTMENT IN MUTUAL FUNDS IS NOT THE BUSINESS ACTI VITY OF ASSESSEE. SINCE ASSESSEE HAS EARNED DIVIDEND INCOME ON INVEST MENT MADE IN MUTUAL FUNDS, WHICH IS EXEMPT FROM TAX, AO OBSERVED THAT ASSESSEE HAS DIVERTED BORROWED MONEY TO NON-BUSINESS ACTIVIT IES, THEREFORE, THE INTEREST EXPENDITURE INCURRED FOR SUCH NON-BUSI NESS ACTIVITIES IS NOT ALLOWABLE U/S 36(1)(III). THOUGH, ASSESSEE SUBM ITTED EXPLANATION OBJECTING TO PROPOSED DISALLOWANCE OF I NTEREST EXPENDITURE, BUT, AO DID NOT FIND ANY MERIT IN THE SUBMISSIONS OF ASSESSEE. AO OBSERVED THAT WHILE BORROWING MONEY, A SSESSEE IS PAYING INTEREST AT THE AVERAGE RATE OF 12%. HE FURT HER NOTED THAT THE AGGREGATE VALUE OF INVESTMENT IN MUTUAL FUNDS DURIN G THE YEAR WAS RS. 5472.44 CRORES. ACCORDING TO AO, HAD ASSESSEE N OT INVESTED THIS AMOUNT IN MUTUAL FUND, IT WOULD NOT HAVE INCUR RED INTEREST EXPENDITURE TO THE EXTENT INVESTED IN MUTUAL FUND. ON THE AFORESAID ANALYSIS, AO CONCLUDED THAT PROPORTIONATE INTEREST @ 12% ON INVESTMENT IN MUTUAL FUND ON ACTUAL PERIOD OF HOLDI NG HAS TO BE DISALLOWED U/S 36(1)(III) AND ACCORDINGLY, HE WORKE D OUT THE DISALLOWANCE AT RS. 7,85,32,001. BEING AGGRIEVED OF SUCH DISALLOWANCE, ASSESSEE CHALLENGED THE SAME BEFORE L D. CIT(A). 13. IN COURSE OF HEARING BEFORE LD. CIT(A), PRIMARY CONTENTION OF ASSESSEE WAS, INVESTMENT IN MUTUAL FUNDS WERE MADE OUT OF SURPLUS FUND AND THE BORROWED FUNDS WERE NOT AT ALL UTILIZE D FOR MAKING SUCH ITA NOS. 24/H/15 & 1928/H/14 SPANDANA SPHOORTY FINANCIAL LTD., HYD. 6 INVESTMENT. IT WAS FURTHER SUBMITTED THAT BANK LOAN S WERE FOR SPECIFIC PURPOSE AND AS PER THE CONDITIONS ATTACHED TO THE SAID LOANS, ASSESSEE WAS NOT PERMITTED TO UTILIZE BORROW ED FUNDS FOR ANY ACTIVITY OTHER THAN MAKING DISBURSEMENT TO THE BORR OWERS. IN SUPPORT OF SUCH CONTENTION, ASSESSEE BROUGHT TO THE NOTICE OF CIT(A) TERMS AND CONDITIONS IMPOSED BY THE BANKS WHILE ADVANCING LOAN. 14. LD. CIT(A) OBSERVED THAT AS PER THE FINANCIAL S TATEMENTS OF ASSESSEE, IT WAS HAVING SUFFICIENT RESERVES AND SUR PLUS TO MAKE INVESTMENT IN MUTUAL FUNDS. RELYING UPON A DECISION OF THE HONBLE BOMBAY HIGH COURT IN CASE OF CIT VS. RELIANCE UTILI TIES AND POWER LTD., 313 ITR 340, LD. CIT(A) OBSERVED THAT WHEN AS SESSEE WAS HAVING OWN INTEREST FREE FUNDS, WHICH IS SUFFICIENT TO TAKE CARE OF THE INVESTMENTS MADE IN MUTUAL FUNDS DURING THE YEAR, I T HAS TO BE PRESUMED THAT SUCH INVESTMENTS WERE MADE OUT OF THE INTEREST FREE FUNDS AND THE BORROWED FUNDS WERE UTILIZED FOR THE PURPOSE FOR WHICH IT WAS ADVANCED BY THE BANK. ACCORDINGLY, SHE DELETED THE ADDITION MADE BY AO ON ACCOUNT OF DISALLOWANCE U/S 36(1)(III). 15. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IALS ON RECORD. AS COULD BE SEEN FROM THE MATERIALS ON RECO RD, THERE IS NO DISPUTE TO THE FACT THAT ASSESSEE WAS HAVING SUFFIC IENT SURPLUS FUNDS AVAILABLE WITH HIM TO MAKE INVESTMENTS. IT IS THE C LAIM OF ASSESSEE THAT OWN SURPLUS FUNDS AVAILABLE WITH ASSESSEE WERE UTILIZED FOR MAKING INVESTMENT IN MUTUAL FUNDS AND NO BORROWED F UNDS WERE UTILIZED. THE DEPARTMENT HAS NOT BROUGHT ANY MATERI AL ON RECORD TO CONTROVERT THE AFORESAID FACT. IT IS WELL SETTLED P RINCIPLE OF LAW THAT UNLESS A NEXUS IS ESTABLISHED BETWEEN BORROWED FUND S AND THE INVESTMENT MADE FOR EARNING EXEMPT INCOME, NO DISAL LOWANCE COULD BE MADE ON NOTIONAL BASIS. IN THE PRESENT CASE, THE RE IS NO DISPUTE TO THE FACT THAT BORROWED FUNDS WERE FOR SPECIFIC P URPOSE. IT IS NOT THE CASE OF THE DEPARTMENT THAT ASSESSEE DURING THE YEAR HAS NOT LENT ANY MONEY TO ITS CUSTOMERS. THAT BEING THE CAS E, IT CANNOT BE SAID THAT BORROWED FUNDS WERE UTILIZED FOR NON-BUSI NESS PURPOSE. UNLESS THE DEPARTMENT ESTABLISHES A NEXUS BETWEEN I NVESTMENT ITA NOS. 24/H/15 & 1928/H/14 SPANDANA SPHOORTY FINANCIAL LTD., HYD. 7 MADE AND THE BORROWAL OF FUNDS, NO DISALLOWANCE OF INTEREST EXPENDITURE ON PRESUMPTIVE BASIS CAN BE MADE. FURTH ER, IT IS NOT DISPUTED THAT ASSESSEE WAS HAVING ENOUGH SURPLUS AN D RESERVES TO MAKE THE INVESTMENT IN MUTUAL FUNDS. THE HONBLE BO MBAY HIGH COURT IN CASE OF CIT VS. RELIANCE UTILITIES AND POW ER LTD. (SUPRA) HAS HELD THAT IF ASSESSEE IS HAVING OWN FUNDS AS WE LL AS BORROWED FUNDS, THE PRESUMPTION WOULD BE OWN FUNDS HAVE BEEN UTILIZED FOR MAKING INVESTMENT. IN VIEW OF THE AFORESAID, SINCE THE REVENUE HAS FAILED TO ESTABLISH THAT BORROWED FUNDS WERE UTILIZ ED FOR MAKING INVESTMENTS, NO DISALLOWANCE OF INTEREST EXPENDITUR E CAN BE MADE NOTIONALLY. WE, THEREFORE, UPHOLD THE ORDER OF LD. CIT(A) BY DISMISSING THE GROUND RAISED. 16. IN THE RESULT, DEPARTMENTS APPEAL IS DISMISSED . 17. TO SUM UP, BOTH ASSESSEES APPEAL AND REVENUES APPEAL ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 26 TH AUGUST, 2015. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 26 TH AUGUST, 2015 KV COPY TO:- 1) SPANDANA SPHOORTY FINANCIAL LTD., PLOT NO. 79, CARE CRYSTAL, NEAR INDIRA NAGAR BUS STOP, VINAYAK NAGAR, GAC HIBOWLI, HYD. 2) ADDL. CIT, RANGE 3, HYDERABAD 3)DCIT, CIRCLE 3(2), 7 TH FLOOR, B BLOCK, IT TOWERS, AC GUARDS, HYDERABAD. 4) CIT(A)-IV, HYDERABAD 5) CIT-III, HYDERABAD 6) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.