M/s Elico Ltd., Hyderabad V. DCIT, Hyderabad

ITA 295/HYD/2009

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66361 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 7 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-10-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 29-06-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 27-02-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: G V HEMALATHA
• Assessee Lawyers: A V RAGHURAM
• Keywords: Business income
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.294/ HYD/2009 : ASS ESSMENT YEAR 2003-04 ITA NO.295/ HYD/2009 : ASS ESSMENT YEAR 2004-05 M/S. ELICO LIMITED, HYDERABAD [PAN - AAACE 5140 L ] V/S. DY. COMMISSIONER OF INCOME-TAX CIRCLE 2(2), HYDERABAD (APPELLANT) (RESP ONDENT) APPELLANT BY : SHRI A.V.RAGHURAM RESPONDENT BY : SMT. G.V. HEMALATHA, CIT-DR DATE OF HEARING 09.10.2012 DATE OF PRONOUNCEMENT 12.10.2012 O R D E R PER SANJAY ARORA, ACCOUNTANT MEMBER: THIS IS A SET OF TWO APPEALS BY THE ASSESSEE, DIR ECTED AGAINST SEPARATE ORDERS DISPOSING ITS APPEALS FOR TWO CONSECUTIVE AS SESSMENT YEARS, BEING AYS 2003-04 AND 2004-05, BY THE COMMISSIONER OF INCOME-TAX(APPE ALS)-III, HYDERABAD (CIT(A)) DATED 09/1/2009 AND 19/12/2008 RESPECTIVELY FOR THE TWO SUCCESSIVE YEARS, I.E., AGAINST ITS ASSESSMENTS FRAMED UNDER SECTION 143(3) OF THE INCO ME-TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE SAID YEARS. AS THE APPEALS RA ISE COMMON ISSUE(S), THE SAME WERE HEARD TOGETHER FOR HEARING, AND ARE BEING DISPOSED OF BY THIS COMMON, CONSOLIDATED ORDER. 2.1 THE FACTS OF THE CASE IN BRIEF ARE THAT THE ASS ESSEE, A COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956, IS ENGAGED IN TWO BUSINESS ES, VIZ. MANUFACTURE OF ELECTRONIC ANALYTICAL INSTRUMENTS AND TRANSCRIPTION OF MEDIC AL RECORDS AND PROVIDING SOFTWARE ITA NOS.294-295/HYD/2009 M/S. ELICO LIMITED, HYDERABAD 2 SERVICES, IN TWO SEPARATE DIVISIONS, I.E., THE INS TRUMENT DIVISION (ID) AND THE SOFTWARE DIVISION (SD) RESPECTIVELY; THE LATTER BEING SET UP IN THE YEAR 1999 AS A HUNDRED-PER-CENT EXPORT ORIENTED UNIT (EOU), ELIGIBLE FOR EXEMPTION U/S.10B OF THE ACT. 2.2 DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR AY 2004-05, THE ASSESSING OFFICER (AO) OBSERVED A CREDIT BALANCE (AT RS.56.95 LAKHS) OF ID IN THE BOOKS OF ACCOUNT OF SD, REFLECTED IN ITS BALANCE SHEET AS AT THE YEAR-END U NDER THE HEAD CURRENT LIABILITIES. ON VERIFICATION, IT WAS FOUND TO BE, IN FACT, A RUNNIN G ACCOUNT OF ID, WITH AN OPENING BALANCE (FOR THE YEAR) AT RS.169.42 LAKHS. IT WAS EXPLAINED BY THE ASSESSEE THAT THE SAME DID NOT REPRESENT A LOAN BY ID TO SD, BUT A CREDIT ARISING ON ACCOUNT OF THE FACT THAT SOME EXPENDITURE OF SD STOOD MET BY ID OR, LIKEWISE, SOM E RECEIPTS OF THE FORMER STAND RECEIVED BY THE LATTER. THE SAME STAND DULY ACCOUNT ED FOR IN THE BOOKS OF ACCOUNT OF THE RESPECTIVE DIVISIONS IN THE FORM OF A RUNNING ACCOU NT. THE ASSESSING OFFICER, HOWEVER, WAS NOT SATISFIED IN-AS-MUCH AS THE RESOURCES OF ID WER E, TO THAT EXTENT, UTILIZED BY THE SD. FURTHER, ID HAD AVAILED LOANS TO THE TUNE OF RS.406 .44 LAKHS, PAYING INTEREST THEREON. THE PROVISION OF SEC.10B(7), WHICH MANDATES APPLICATION OF THE PROVISIONS OF SUB-SECTIONS (8) AND (10) OF S.80IA TO UNDERTAKINGS SPECIFIED IN S.1 0B, SHALL, THEREFORE, BECOME APPLICABLE. HE, ACCORDINGLY, PROPOSED TO REDUCE THE ELIGIBLE PR OFITS OF SD BY THE AMOUNT OF SUCH INTEREST VIDE SHOW CAUSE LETTER DATED 21.12.2006. T HE ISSUE, IN FACT, HAD ALSO ARISEN FOR IMMEDIATELY PRECEDING YEAR, I.E. AY 2003-04, AS WEL L, BY WAY OF REVISIONARY PROCEEDINGS, WHERE-UNDER THE ASSESSEE HAD FURNISHED A DETAILED R EPLY. THE THRUST OF THE CONTENTIONS RAISED BY THE ASSESSEE THEREIN, WHICH WERE SOUGHT T O BE MET BY HIM PER THE SAID SHOW- CAUSE NOTICE, WAS THAT, FIRSTLY, THE SD HAD EARNED SIZEABLE PROFITS (RS.133.72 LAKHS) DURING THE PRECEDING YEARS, I.E., FINANCIAL YEARS 2000-01 TO 2002-03 AND, BESIDES, IT HAS ITS OWN INTEREST-FREE FUNDS, WHICH WERE EMBEDDED IN THE CON SOLIDATED ACCOUNTS OF THE COMPANY. 2.3 THE AO, ON THE BASIS OF THE FINAL ACCOUNTS , SUMMARIZED THE FINANCIAL POSITION QUA SD, AS UNDER: ITA NOS.294-295/HYD/2009 M/S. ELICO LIMITED, HYDERABAD 3 AY PROFITS OF SOFTWARE DIVISION FOR THE YEAR ACCUMULATED PROFITS OF SOFTWARE DIVISION UPTO THE END OF THE YEAR LOAN FROM INSTRUMENTS DIVISION 2000 - 01 ( - ) RS.46,73,057 ( - ) RS.46,73,057 TO BE ASCERTAINED 2001-02 (-)RS.40,86,651 (-)RS.87,59,708 RS. 50,26,398 2002-03 RS.73,27,307 (-) RS.14,32,401 RS.1,55,72,123 2003-04 RS.32,54,286 RS.18,21,885 RS.1,69,41,927 THE LOAN/CREDIT FROM ID WAS, THUS, AVAILABLE EVEN BEFORE THE LOANEE (DEBTOR) DIVISION (SD) HAD EARNED ANY PROFIT. IF NOT EXTENDE D TO ITS SISTER CONCERN (SD), THE INTEREST SUFFERED ON ITS BORROWINGS BY ID WOULD STAND TO BE REDUCED TO THE EXTENT OF INTEREST EXPENDITURE INCURRED THEREON. IN FACT, THE BALANCE IN THE RUNNING ACCOUNT WAS THROUGHOUT IN THE CREDIT, AND DID NOT TURN TO DEBIT EVEN FOR A SI NGLE DAY OF THE YEAR. HE, THEREFORE, WORKED OUT THE INTEREST ATTRIBUTABLE TO THE SAID CREDIT AV AILED BY SD, RECKONED ON AN AVERAGE BASIS AT RS.143.58 LAKHS, AT RS.21.18 LAKHS, I.E., AT THE RATE AT WHICH INTEREST STOOD PAID BY ID ON ITS BORROWINGS, WHICH WAS ADJUSTED (REDUCED) FROM T HE ELIGIBLE PROFITS OF SD FOR AY 2004- 05. LIKE-WISE FOR AY 2003-04, WORKING THE ADJUSTMEN T AT RS. 21.18 LACS. 2.4 IN APPEAL, THE LEARNED CIT(A) FOUND THAT ID HAD NO INTEREST-FREE FUNDS, VIZ. BY WAY OF SHARE CAPITAL, SHARE PREMIUM OR RESERVES, AVAILA BLE WITH IT, WHICH WAS STATED TO BE THE SOURCE OF THE FUNDS (WITH ID) ADVANCED TO SD. A MAT RIX WAS DRAWN, TABULATING THE SAME FOR BOTH THE DIVISIONS, BY HIM AT PARA 5 (PAGE 7) O F THE APPELLATE ORDER. THE SAME SHOWED THAT INVESTMENT IN FIXED ASSETS BY ID WAS THROUGHOU T MORE THAN THE EQUITY AND RESERVES HELD BY IT, BEING AT RS.418.69 LAKHS AND RS.525.08 LAKHS AS AT 31.3.2003AND 31.3.2004 RESPECTIVELY, AS AGAINST RESERVES AND EQUITY AGGREG ATING TO RS.208.05 LAKHS AS ON THE SAID DATES. HOW COULD, THUS, THE AMOUNT OF LOAN EXTENDED TO SD BE SAID TO BE SOURCED FROM THE INTEREST-FREE FUNDS OF ID ? LIKEWISE, THE FIXED ASSETS BLOCK OF SD WAS ITSEL F FINANCED SUBSTANTIALLY FROM BORROWED FUNDS. THERE WERE, THUS , NO SURPLUS FUNDS WITH ID, AND THE ITA NOS.294-295/HYD/2009 M/S. ELICO LIMITED, HYDERABAD 4 AMOUNT ADVANCED TO SD WAS ONLY BY AVAILING OVERDRAF T (OD)/CASH CREDIT (CC) FACILITY FROM SBI. HE FURTHER SUPPORTED HIS FINDINGS BY STAT ING THAT THE INCREASE IN THE LOAN COMPONENT VIS-A-VIS THE INCREASE IN THE FIXED ASSET S OVER THE PRECEDING (THREE TO FIVE) YEARS WAS MUCH MORE IN ID THAN IN SD. CLEARLY, THE BORROW ED FUNDS OF ID WERE DIVERTED TO SD. PROVISION OF SEC.10B(7) READ WITH SS.80IA(8) AND 80 IA(10) WAS, IN HIS VIEW, THUS, RIGHTLY INVOKED BY THE AO, DISALLOWING THE INTEREST PAYABLE ON THE AMOUNT DUE TO ID IN COMPUTING THE ELIGIBLE PROFIT OF SD. THE AO, HAD HOWEVER, COM PUTED THE SAME AT 12% PER ANNUM AS AGAINST THE AVERAGE RATE OF 11.2% PER ANNUM ACTUALL Y INCURRED BY THE ID. ACCORDINGLY, HE DIRECTED FOR THE SCALING DOWN OF THE DISALLOWANCE T O THE PROPORTIONATE EXTENT. 2.5 AGGRIEVED, THE ASSESSEE IS IN APPEAL FOR AYS 20 03-04 AND 2004-05. 3.1 LIKE SUBMISSIONS WERE MADE BY THE LD. AUTHORIZE D REPRESENTATIVE (AR) FOR THE ASSESSEE BEFORE US. THE THRUST OF HIS ARGUMENTS WAS THAT ID HAD ACCESS TO BOTH INTEREST-FREE AND INTEREST-BEARING FUNDS; AND THAT THE AMOUNT ADV ANCED TO SD COULD NOT, THEREFORE, BE ASCRIBED TO THE LATTER, WARRANTING ADJUSTMENT TO TH E ELIGIBLE PROFIT OF SD. HE WOULD FURTHER BRING TO OUR NOTICE THE FACT THAT THE ASSESSEE HAD, IN FACT, REVALUED ITS FIXED ASSETS BY RS.200.80 LAKHS, WHICH, THUS, OUGHT TO BE EXCLUDED IN COMPUTING ITS INVESTMENT IN FIXED ASSETS, AS THE SAME DID NOT ENTAIL ANY OUTGO OF FUN DS. LEGALLY SPEAKING, THE LOAN ADVANCED IS IN THE ORDINARY COURSE OF BUSINESS, BONA FIDE , AND NO MALA FIDES COULD BE ATTRIBUTED THERETO, AS HAS BEEN DONE BY THE AO BY APPLYING S.1 0B(7) R/W SS.80IA(8) AND 80IA(10); AND THAT THERE HAS BEEN NO ATTEMPT BY THE ASSESSEE TO INFLATE THE PROFITS OF ONE UNIT AT THE COST OF THE OTHER. 3.2 THE LD. DEPARTMENTAL REPRESENTATIVE (DR), ON TH E OTHER HAND, RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. ITA NOS.294-295/HYD/2009 M/S. ELICO LIMITED, HYDERABAD 5 4.1 S. 80IA(8), WHICH STANDS CO-OPTED IN SEC.10 B THROUGH S.10B(7), READS AS UNDER: (8) WHERE ANY GOODS OR SERVICES HELD FOR THE PURPOS ES OF THE ELIGIBLE BUSINESS ARE TRANSFERRED TO ANY OTHER BUSINESS CARR IED ON BY THE ASSESSEE, OR WHERE ANY GOODS OR SERVICES HELD FOR THE PURPOSES O F ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE ARE TRANSFERRED TO THE E LIGIBLE BUSINESS AND, IN EITHER CASE, THE CONSIDERATION, IF ANY, FOR SUCH TR ANSFER AS RECORDED IN THE ACCOUNTS OF THE ELIGIBLE BUSINESS DOES NOT CORRESPO ND TO THE MARKET VALUE OF SUCH GOODS OR SERVICES AS ON THE DATE OF THE TRANSF ER, THEN, FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, THE PROFITS AN D GAINS OF SUCH ELIGIBLE BUSINESS SHALL BE COMPUTED AS IF THE TRANSFER, IN E ITHER CASE, HAD BEEN MADE AT THE MARKET VALUE OF SUCH GOODS OR SERVICES AS ON THAT DATE: PROVIDED THAT WHERE, IN THE OPINION OF THE ASSESSING OFFICE R, THE COMPUTATION OF PROFITS AND GAINS OF THE ELIGIBLE BUSINESS IN TH E MANNER HEREINABOVE SPECIFIED PRESENTS EXCEPTIONAL DIFFICULTIES, THE AS SESSING OFFICER MAY COMPUTE SUCH PROFITS AND GAINS ON SUCH REASONABLE BASIS AS HE MAY DEEM FIT . 4.2 THE ASSESSEE HAS ORGANIZED ITS BUSINESS IN TWO SEPARATE UNITS, WITH SEPARATE BOOKS OF ACCOUNT, ON THE BASIS OF WHICH THEIR RESPECTIVE PROFITS AND, ACCORDINGLY, THE ASSESSEES BUSINESS INCOME IS ASSESSED. IN THE INSTANT CASE, IT IS AN ADMITTED FACT THAT THE FUNDS OF ID TO THE EXTENT OF RS.143.58 LAKHS, I.E., ON AN AVERA GE, WERE ACCESSED BY SD FOR ITS BUSINESS. THE QUESTION, THEREFORE, THAT ARISES IN THE CONTEXT OF SEC. 10B(7) R/W S. 80IA(8), IS WHETHER ANY CHARGE WAS MADE BY ID TO SD ON ACCOUNT OF THE P ROVISION OF THE SAID FUNDS, AND, IF SO, WHETHER IT CORRESPONDS WITH THE MARKET VALUE FOR TH E SAME. CLEARLY, NO INTEREST, WHICH SIGNIFIES THE TIME COST OF FUNDS, WAS CHARGED BY ID TO SD. THAT BEING THE CASE, WE ARE UNABLE TO SEE AS TO HOW THE AO IS NOT JUSTIFIED IN LAW IN MAKING THE IMPUGNED ADJUSTMENT TO THE PROFITS OF THE ASSESSEE IN SD, EVEN AS THE S AME WOULD NOT RESULT IN ANY INCREASE IN THE OVERALL PROFITS OF THE ASSESSEE. IN OTHER WORDS , EVEN IF NO INTEREST IS PAID BY ID ON FUNDS ADVANCED TO SD, I.E., THE SAME ARE NOT SOURCE D FROM ITS BORROWINGS, IT CANNOT BE ITA NOS.294-295/HYD/2009 M/S. ELICO LIMITED, HYDERABAD 6 DENIED THAT SUCH FUNDS HAVE AN IMPLICIT OPPORTUNITY COST, MEASURED BY THE INTEREST RATE IN THEIR RESPECT, TO WHICH EXTENT, THEREFORE, ABSENCE OF ANY CHARGE BY ID TO SD MAKES THE LATTERS PROFIT VULNERABLE TO ADJUSTMENT UNDER LAW. FURTHER, ON FACTS, THE AUTHORITIES BELOW HAVE FOUND THAT ID HAD NO SURPLUS INTEREST-FREE FUN DS, SO THAT IT HAD INCURRED INTEREST COST THEREON, AND THE IMPUGNED ADJUSTMENT WAS VALUED ONL Y WITH REFERENCE THERETO, I.E., THE INTEREST COST SUFFERED ON THE OD/CC FACILITY AVAILE D BY ID DURING THE YEAR. THAT IN FACT MAKES THE REVENUES CASE IMPREGNABLE. NO CASE TO A SSAIL THE SAID FINDINGS OF THE REVENUE HAS BEEN MADE OUT BEFORE US. THE ASSESSEES CONTENT ION OF THE SD BEING IN PROFIT OR ITS PROFIT HAVING BEEN WRONGLY COMPUTED BY THE AO IS TO NO AVAIL. THIS IS AS, EVEN AS EXPLAINED BY THE BENCH DURING THE COURSE OF HEARING , WHATEVER MAY BE THE PROFIT OR LOSS OF SD (OVER THE YEARS), THE FUNDS UNDER REFERENCE ARE ONLY THAT ACCESSED OR AVAILED OF BY IT IN ADDITION THERETO. FURTHER, IN VIEW OF THE VARIATION IN THE FUNDS UTILIZED DURING THE YEAR, INTEREST HAS BEEN RIGHTLY WORKED OUT ON AVERAGE BAL ANCE, IN THE WORKING OF WHICH, AGAIN, NO INFIRMITY HAS BEEN POINTED OUT BY THE ASSESSEE. WITH REGARD TO ITS ARGUMENTS QUA REVALUATION OF ITS ASSETS, THE SAME IS AGAIN TO NO EFFECT. THIS IS AS THE CREDIT CORRESPONDING TO THE DEBIT TO THE FIXED ASSETS, AS POINTED OUT BY THE BENCH DURING THE HEARING, IS ONLY TO THE RESERVE ACCOUNT, SO THAT THOUGH THERE IS NO OUT FLOW OF FUNDS, YET THE RESERVES (OR INTEREST-FREE CAPITAL) GET AUGMENTED TO THE SAME EX TENT. 4.3 THE ONLY RECOURSE, IN OUR VIEW, WITH THE ASSES SEE WAS TO SHOW, WITH REFERENCE TO THE FINANCIAL POSITION (BALANCE SHEET) OF ID, THAT IT HAD SURPLUS FUNDS IN THE FORM OF SHARE CAPITAL FUNDS, WHICH HAD NOT BEEN ALLOCATED TO THE OTHER UNIT, I.E., THAT THE ENTIRE CAPITAL OF THE ASSESSEE-COMPANY IS ACCOUNTED FOR IN THE BOOKS OF ID, SO THAT THE AMOUNT ADVANCED TO SD ONLY REPRESENTS PART OF THE SAID SHARE CAPITAL, WHICH CAN BE RIGHTLY CONSIDERED AS ALLOCATED OR FORMING PART OF THE CAPITAL STRUCTURE OF SD. IN OTHER WORDS, THAT THE ISSUE ARISES ONLY IN VIEW OF THE FACT OF SHARE CAPITAL HA VING NOT BEEN EARMARKED FOR SD. HOWEVER, WE FIND THAT, FIRSTLY, FUNDS STAND SEPARAT ELY CAPITALIZED IN THE BOOKS OF SD. ITA NOS.294-295/HYD/2009 M/S. ELICO LIMITED, HYDERABAD 7 FURTHER, AS AFORESAID, NO SURPLUS INTEREST-FREE FUN DS, INCLUDING SHARE CAPITAL, HAVE BEEN SHOWN WITH ID. 5.1 UNDER THE CIRCUMSTANCES, IN OUR CLEAR VIEW, NO CASE FOR DELETION OF THE IMPUGNED ADJUSTMENT HAS BEEN MADE OUT BY THE ASSESSEE, AND T HE PROVISION OF S.10B(7) HAS BEEN RIGHTLY INVOKED IN LAW BY THE AO FOR BOTH THE YEARS UNDER REFERENCE. 5.2 AS REGARDS THE QUANTUM OF ADJUSTMENT, THE LD. C IT(A) HAS DIRECTED FOR ITS RESTRICTION TO THE AMOUNT ACTUALLY BORNE BY THE ASSESSEE-COMPAN Y IN ID. THE AO SHALL VERIFY THE SAME INASMUCH AS THE AMOUNT SPECIFIED BY THE LD. CIT(A) IN HIS ORDER DOES NOT AGREE OR CORRESPOND WITH THE INTEREST RATE MENTIONED BY HIM, AND WHICH IS APPARENTLY ANOMALOUS. ALSO, THE INTEREST IS NORMALLY CHARGED BY THE BANKS /FIS ON PERIODICAL (SAY, QUARTERLY) BASIS, LEADING TO AN INCREASE IN THE EFFECTIVE RATE OF INT EREST, WHEN RECKONED ON AN ANNUAL BASIS, AS HAS BEEN APPLIED BY THE AO. THE AO SHALL, THUS, VERIFY THE WORKING OF THE INTEREST RATE TO BE CHARGED, AS WELL AS ITS APPLICATION, WITH DUE OPPORTUNITY OF HEARING TO THE ASSESSEE. THIS DIRECTION BY US IS ONLY IN AGREEMENT AND CONFO RMITY WITH THE DIRECTION OF THE LD. CIT(A) CONFIRMING APPLICATION OF INTEREST AS ACTUAL LY BORNE BY THE ID FOR WORKING OUT THE ELIGIBLE PROFITS OF SD FOR BOTH THE YEARS UNDER REF ERENCE. WE DECIDE ACCORDINGLY. 6. IN THE RESULT, THE ASSESSEES APPEALS FOR BOTH T HE YEARS ARE DISMISSED. ORDER PRONOUNCED IN THE COURT ON SD/- SD/- (SAKTIJIT DEY) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER DT/- OCTOBER 12 , 2012 ITA NOS.294-295/HYD/2009 M/S. ELICO LIMITED, HYDERABAD 8 COPY FORWARDED TO: 1. M/S. ELICO LIMITED, B-90, APIE-SANATHNAGAR, HYDERAB AD 500 018 2. 3. 4 5. DY. COMMISSIONER OF INCOME-TAX, CIRCLE 2(2), HYDERA BAD COMMISSIONER OF INCOME-TAX(APPEALS)-III, HYDERABAD COMMISSIONER OF INCOME-TAX-II, HYDERABAD DEPARTMENTAL REPRESENTATIVE, ITAT, HYDERABAD. B.V.S.