Gulf Oil Corporation Ltd., Hyderabad V. Dy. Commissioner of income Tax, Circle-2(31), Hyderabad

ITA 300/HYD/2014

• Counselvise Citation: 30022514 RSA 2014
• Duration Of Justice: 1 year(s) 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 14-10-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 26-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KONDA RAMESH
• Keywords: Depreciation; Transfer pricing; International transaction; Earning of tax free income; Cost of acquisition; Fair market value; Unabsorbed depreciation
• Section: 143(3); 14A

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SMT. P. MADHAVI DEVI, JUDICIAL MEMBER ITA NO. 300/HYD/2014 ASSESSMENT YEAR: 2009-10 GULF OIL CORPORATION LTD., HYDERABAD PAN AABCG 8433B VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 2(3), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI Y. RATNAKAR REVENUE BY : SHRI KONDA RAMESH DATE OF HEARING : 15-10-2015 DATE OF PRONOUNCEMENT : 16-10-2015 O R D E R PER P; MADHAVI DEVI, J.M.: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST T HE ORDER DATED 31/12/2013 OF AO U/S 143(3) READ WITH SECTION 92CA( 3) OF THE IT ACT PASSED CONSEQUENT TO THE DIRECTIONS OF DRP, HYDERA BAD, U/S 144C(3) OF THE IT ACT, FOR THE AY 2009-10. 2. BRIEFLY, THE FACTS OF THE CASE ARE THAT THE ASSE SSEE COMPANY, WHICH IS ENGAGED IN THE MANUFACTURE OF DETONATORS, INDUSTRIAL EXPLOSIVES AND ITS ACCESSORIES AND LUBRICANT OILS & GREASE, CONTRACTS FOR DRILLING, BLASTING & EXCAVATION, METAL CLADDING , FLORICULTURE, PROPERTY DEVELOPMENT, ETC., FILED ITS ORIGINAL RETU RN OF INCOME FOR THE AY 2009-10 DECLARING TOTAL INCOME AT RS. NIL AFTER SET OFF OF BROUGHT FORWARD BUSINESS LOSSES AND LONG TERM CAPITAL GAIN OF RS. 22,89,67,996. DURING THE COURSE OF ASSESSMENT PROCE EDING U/S 143(3), AO OBSERVED THAT ASSESSEE HAD ENTERED INTO AN INTERNATIONAL TRANSACTION WITH ITS AE AND, THEREFORE, THE SAME WA S REFERRED TO TRANSFER PRICING OFFICER (TPO) FOR DETERMINATION OF ARMS LENGTH PRICE 2 ITA NO. 300/HYD/2014 GULF OIL CORPORATION LTD. OF INTERNATIONAL TRANSACTION. THE TPO SUGGESTED THE TRANSFER PRICING ADJUSTMENT U/S 92CA(3) OF THE IT ACT, CONSEQUENT TO WHICH, DRAFT ASSESSMENT ORDER WAS PASSED ON 30/03/2013 AND THE S AME WAS SERVED ON THE ASSESSEE. THE ASSESSEE FILED ITS OBJE CTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) AGAINST THE ADDITION S SUGGESTED BY THE AO IN THE DRAFT ASSESSMENT ORDER. THE DRP REJEC TED THE ASSESSEES OBJECTIONS, BASED ON WHICH, FINAL ASSESS MENT ORDER WAS PASSED BY THE AO VIDE ORDER DATED 31/12/2013. AGAI NST THE SAID ASSESSMENT ORDER, ASSESSEE IS IN APPEAL BEFORE US. 3. THE ASSESSEE HAS CHALLENGED THE ADDITIONS MADE O N ACCOUNT OF I) APPLICATION OF SECTION 14A OF THE IT ACT READ WI TH RULE 8D OF THE IT RULES OF A SUM OF RS. 1,97,000 AND II) QUANTIFICATI ON OF CAPITAL GAINS ON TRANSFER OF SPECIALTY CHEMICAL DIVISION. 4. BRIEFLY, THE FACTS RELATING TO THE ABOVE ISSUES ARE THAT ON PERUSAL OF THE BALANCE SHEET AS ON 31/03/2009, THE AO OBSERVED THAT THE ASSESSEE HAS SHOWN INVESTMENT OF RS. 3067.67 LA KHS AND FURTHER AS SEEN FROM THE SCHEDULE14 TO PROFIT & LOSS ACCOUN T, AN AMOUNT OF RS. 1,97,000 IS SHOWN AS DIVIDED INCOME LONG TERM . HE OBSERVED THAT THE DIVIDEND INCOME HAS BEEN SHOWN AS OTHER IN COME AND AN AMOUNT OF RS. 2917.29 LAKHS HAS BEEN CLAIMED AS INT EREST EXPENSES. THE AO, THEREFORE, ASKED THE ASSESSEE TO FURNISH C LARIFICATION AS TO WHY SECTION 14A READ WITH RULE 8D WAS NOT APPLICABL E IN VIEW OF THE DIVIDEND INCOME EARNED BY ASSESSEE. IN RESPONSE TO THE SAME, THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY HAD RE CEIVED DIVIDEND INCOME OF RS. 1,97,000 FROM ONLY THREE COM PANIES AND HAS NEVER INCURRED ANY EXPENDITURE WHATSOEVER IN EARNIN G DIVIDEND INCOME AND OBJECTED FOR THE DISALLOWANCE U/S 14A RE AD WITH RULE 8D. IT WAS FURTHER SUBMITTED THAT SHARES WERE PURCHASED OU T OF ASSESSEES OWN FUNDS AND NOT OUT OF INTEREST BEARING BORROWED FUNDS, AND, THEREFORE, NO EXPENDITURE IS TO BE DISALLOWED UNDER RULE 8D. IT WAS FURTHER SUBMITTED THAT THE AMOUNT OF DISALLOWANCE, IF ANY, TO BE MADE CANNOT EXCEED THE AMOUNT OF EXEMPTED INCOME ITSELF. IN SUPPORT OF 3 ITA NO. 300/HYD/2014 GULF OIL CORPORATION LTD. THIS CONTENTION, ASSESSEE RELIED UPON THE DECISION OF ITAT, DELHI IN THE CASE OF DCIT VS. JINDAL PHOTO LTD. THE AO, HOWE VER, HELD THAT THE ASSESSEE COULD NOT FURNISH THE DETAILS OF EXPEN DITURE INCURRED TOWARDS EARNING OF EXEMPT INCOME U/S 10(35) OF THE IT ACT. HE OBSERVED THAT RULE 8D IS APPLICABLE TO THE RELEVANT AY 2009-10 AND APPLYING THE FORMULA GIVEN UNDER RULE 8D HE COMPUTE D THE DISALLOWANCE AT RS. 8,11,30,099 BUT RESTRICTED THE DISALLOWANCE TO THE DIVIDEND INCOME EARNED DURING THE YEAR I.E. RS. 1,9 7,000. 5. FURTHER, THE AO ALSO OBSERVED THAT THE ASSESSEE HAS TRANSFERRED SPECIALTY CHEMICAL DIVISION TO M/S IDL SPECIALTY CHEMICALS LTD. (IDL [SC] ) BY WAY OF DEMERGER SCHEM E APPROVED BY THE HONBLE HIGH COURT OF A.P. WITH EFFECT FROM 01/ 04/08. HE OBSERVED THAT, IN LIEU OF THE TRANSFER, THE ASSESSE E HAS RECEIVED 97,60,000 SHARES OF IDL (SC) WITH A FACE VALUE OF R S. 10 AND PREMIUM OF RS. 55.31 AND THE SAID CONSIDERATION OF RS. 63.74 CRORES REPRESENTED THE EXCESS OF ASSETS OVER LIABILITIES O F SPECIALTY CHEMICALS DIVISION TRANSFERRED TO IDL (SC). SINCE T HE ASSESSEE WAS HOLDING THE ENTIRE SHARE CAPITAL OF IDL (SC), THE A O HELD THAT THE TRANSACTION IS NOT TO BE TREATED AS TRANSFER UNDER CLAUSE (IV) OF SECTION 47 OF THE IT ACT FOR THE PURPOSE OF TAXABILITY OF C APITAL GAINS IN THE HANDS OF THE ASSESSEE. HOWEVER, THE AO FURTHER OBSE RVED THAT DURING THE FY 200910, THE ASSESSEE DILUTED ITS STAKE IN ID L (SC) AND CONSEQUENTLY, IDL (SC) WAS NO LONGER THE WHOLLY OWN ED SUBSIDIARY OF THE ASSESSEE WITHIN A PERIOD OF EIGHT YEARS OF THE TRANSFER AND THEREFORE, HE WAS OF THE OPINION THAT THE EXEMPTION UNDER CLAUSE (IV) OF SECTION 47 OF THE IT ACT STOOD WITHDRAWN AND THE ASSESSEE WAS LIABLE FOR CAPITAL GAINS. HE OBSERVED THAT WHILE CO MPUTING CAPITAL GAINS, THE ASSESSEE ADOPTED A VALUE OF RS. 42.29 CR ORES AS THE CONSIDERATION RECEIVED. ASSESSEE WAS ASKED TO FURNI SH THE BASIS FOR ADOPTING THE CONSIDERATION RECEIVED AS RS. 42,29,46 ,000. THE ASSESSEE SUBMITTED DETAILED CALCULATION AND SUBMITT ED THAT ASSETS WERE REVALUED AND THE FAIR MARKET VALUE OF THE ASSE TS WAS ADOPTED AS 4 ITA NO. 300/HYD/2014 GULF OIL CORPORATION LTD. THE NET CONSIDERATION RECEIVED. THE AO, HOWEVER, OB SERVED THAT THE ACTUAL CONSIDERATION RECEIVED BY THE ASSESSEE IN LI EU OF TRANSFER OF SPECIALTY CHEMICAL DIVISION IS RS. 63.74 CRORES AND , THEREFORE, HE WAS OF THE OPINION THAT THE ACTUAL VALUE RECEIVED BY TH E ASSESSEE SHOULD BE ADOPTED FOR THE PURPOSE OF COMPUTATION OF CAPITA L GAIN. HE, ACCORDINGLY, BROUGHT THE DIFFERENCE TO TAX. THE DRP CONFIRMED THE ORDER OF THE AO AND THE ASSESSEE IS IN APPEAL BEFOR E US. 6. ON THE ISSUE OF DISALLOWANCE U/S 14A READ WITH R ULE 8D OF THE IT ACT, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TOTAL AMOUNT OF RS. 32 CRORES ONLY WAS INVESTED IN THE SH ARES OF THREE COMPANIES FROM ASSESSEES OWN FUNDS AND THE DIVIDEN D BEING DIRECTLY CREDITED TO THE ASSESSEES BANK ACCOUNT, THERE ARE NO EXPENSES INCURRED BY THE ASSESSEE FOR EARNING DIVIDEND INCOM E AND, HENCE, PROVISIONS UNDER SECTION 14A READ WITH RULE 8D ARE NOT APPLICABLE. 7. THE LD. DR, ON THE OTHER HAND, SUPPORTED THE ORD ERS OF THE AUTHORITIES BELOW. 8. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE FIND THAT THE ASSESSEE HAS CLAIMED THAT NO EXPENSES WERE INCURRED FOR EARNING DIVIDEND INCOME, WHICH IS EXEM PT FROM TAX. THE AY BEFORE US BEING 2009-10 AND, THEREFORE, THE PROV ISIONS OF RULE 8D ARE CLEARLY APPLICABLE. HOWEVER, WHERE ASSESSEE CLA IMS THAT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING OF EXEMPT INCOME, THE PROVISIONS OF SECTION 14A REQUIRE THAT AO, HAVING R EGARD TO THE BOOKS OF THE ASSESSEE, HAS TO DETERMINE THE AMOUNT OF EXP ENDITURE INCURRED IN RELATION TO SUCH INCOME. THEREFORE, THE APPLICAT ION OF RULE 8D IS NOT AUTOMATIC, BUT, IS SUBJECT TO SUB-SECTION (2) OF SE CTION 14A OF THE IT ACT, AS HELD BY THE HONBLE BOMBAY HIGH COURT IN CA SE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT, 328 ITR 81. IN THE CASE BEFORE US, THE AO HAS NOT CARRIED OUT ANY SUCH EXER CISE, BUT, HAS MERELY APPLIED THE PROVISIONS OF SECTION 14A READ W ITH RULE 8D TO COMPUTE THE DISALLOWANCE AT RS. 8,11,30,099 AND RES TRICTED IT TO RS. 5 ITA NO. 300/HYD/2014 GULF OIL CORPORATION LTD. 1,97,000 I.E. THE DIVIDEND INCOME EARNED BY ASSESSE E. IN VIEW OF OUR ABOVE DISCUSSION, THE SAID DISALLOWANCE IS NOT SUST AINABLE. ACCORDINGLY, THE DISALLOWANCE MADE BY AO U/S 14A RE AD WITH RULE 8D IS HEREBY DELETED. 8.1 AS REGARDS THE SECOND ISSUE I.E. QUANTIFICATION OF CAPITAL GAINS, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE NEXT AY I.E. 2010-011 THE ENTIRE SHARES OF RS. 97,60,000 WE RE SOLD BY THE ASSESSEE COMPANY TO HINDUJA VENTURES LTD. FOR A TOT AL CONSIDERATION OF RS. 2,10,00,000 AND CAPITAL LOSS WAS COMPUTED BY THE ASSESSEE BY TAKING THE VALUE OF ASSETS AS PER THE VALUERS CERT IFICATE I.E. RS. 42,29,46,000. HOWEVER, IN VIEW OF THE ASSESSMENT MA DE FOR THE ASSESSMENT YEAR 2009-10 AND CONSIDERING THE FACT TH AT THE DRP HAS HELD THE VALUE OF SHARES ALLOTTED TO BE AT RS. 63,7 4,14,000, THE ASSESSEE REVISED ITS WORKING AND REQUESTED THE AO T O COMPUTE THE LOSS ACCORDINGLY. HE SUBMITTED THAT IN DRAFT ASSES SMENT ORDER FOR THE AY 2010-11, THE AO HAD COMPLETELY IGNORED THE CAPIT AL LOSS REPORTED BY THE ASSESSEE ON THE GROUND THAT THE SALE OF SHAR ES IS COLLUSIVE AND, THEREFORE, THE ENTIRE CAPITAL LOSS CLAIMED HA S TO BE DISALLOWED. HE SUBMITTED THAT THIS ISSUE HAS TRAVELLED UP TO TH E TRIBUNAL AND THE TRIBUNAL HAS REMITTED THE MATTER BACK TO THE FILE O F THE AO FOR EXAMINATION AFRESH. IT IS SUBMITTED THAT THE VALUE WHICH HAS BEEN TAKEN FOR THE AY 2009-10 WILL HAVE TO BE ADOPTED AS COST OF ACQUISITION OF SHARES, WHICH WERE SOLD IN AY 2010-1 1 FOR ARRIVING AT THE CAPITAL LOSS ON THE SALE OF SHARES. SINCE THIS MATTER HAS BEEN REMITTED BACK TO THE AO FOR THE AY 2010-11, HE PRAY ED THAT IT WILL BE APPROPRIATE IF THE ISSUE IS ALSO REMITTED BACK TO T HE AO FOR AY 2009- 10 TO AVOID INCONSISTENCY IN THE VALUATION FOR DETE RMINING THE CAPITAL GAIN/CAPITAL LOSS OF THE VERY SAME ASSET, WHICH IS COMING IN FOR CONSIDERATION FOR BOTH THE AYS. 9. THE LD. DR, THOUGH, DID NOT LEAVE HIS GROUND, DI D NOT SERIOUSLY OBJECT TO THE REMITTANCE OF THE ISSUE BACK TO THE FILE OF THE AO. 6 ITA NO. 300/HYD/2014 GULF OIL CORPORATION LTD. 10. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE TRANSACTION OF TRANSFER OF SHARES TO ASSESSEE AND FURTHER TRANSFER OF SAME SHARES IN THE SUBSEQUE NT AYS TO HINDUJA VENTURES, BOTH THE TRANSACTION BEING LINKED TO EACH OTHER AND HENCE THE VALUE ADOPTED IN AY 2009-10 WOULD BE COST OF AC QUISITION IN AY 2010-11. SINCE THE VALUATION OF SHARES FOR THE AY 2 010-11 HAS BEEN REMITTED TO THE FILE OF THE AO FOR COMPUTING CAPITA L GAINS FROM SUCH TRANSACTION, THE COST OF ACQUISITION TO BE ADOPTED BY AO FOR AY 2010- 11 WOULD BE RELEVANT FOR COMPUTING CAPITAL GAIN FRO M THE TRANSACTION OF AY 2009-10. THEREFORE, IN ORDER TO HAVE A UNIFOR M AND CONSISTENT VIEW, WE DEEM IT FIT AND PROPER TO REMIT THE ISSUE TO THE FILE OF THE AO FOR THIS AY ALSO. ACCORDINGLY, THIS ISSUE IS TO BE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 11. FURTHER, WE FIND THAT THE ASSESSEE HAS RAISED A N ISSUE IN GROUND NO. 5 THAT TO THE UNABSORBED DEPRECIATION CA RRIED FORWARD FOR SET OFF IS ACTUALLY RS. 14,96,58,380 AND THE SAME I S NOT CORRECTLY QUANTIFIED BY THE AO. IN GROUND NO. 6, THE ASSESSE E CONTENDED THAT THE IT IS ENTITLED TO CREDIT FOR TDS OF RS. 6,33,20 ,912 AND THE AO HAS RESTRICTED THE SAME TO RS. 5,76,81,511 ERRONEOUSLY. HE HAS ALSO FILED FORM NO. 26AS TO SUPPORT THE CONTENTION THAT THE AM OUNT TO BE GIVEN CREDIT AS ON THE DATE OF FILING OF THE APPEAL IS RS . 6,18,56,332. 12. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AFORESAID TWO ISSUES MAY ALSO BE REMITTED TO THE FI LE OF THE AO FOR RE- VERIFICATION AND COMPUTATION IN ACCORDANCE WITH LAW . THE LD. DR DID NOT OPPOSE THIS SUBMISSION OF LD. AR. 13. HAVING REGARD TO THE RIVAL SUBMISSIONS AND MATE RIAL ON RECORD, WE DEEM IT FIT AND PROPER TO REMIT THESE TWO ISSUES ALSO FOR VERIFICATION BY AO AND DIRECT THE AO TO ALLOW THE S AME IN ACCORDANCE WITH LAW. NEEDLESS TO MENTION THAT THE ASSESSEE SH ALL BE AFFORDED REASONABLE OPPORTUNITY OF HEARING IN ALL THE ABOVE ISSUES. 7 ITA NO. 300/HYD/2014 GULF OIL CORPORATION LTD. 14. IN THE RESULT, ASSESSEES APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 16 TH OCTOBER, 2015. SD/- SD/- (P.M. JAGTAP) (P. MADH AVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 16 TH OCTOBER, 2015 KV COPY TO:- 1) GULF OIL CORPORATION LTD., KUKATPALLI, HYDER ABAD 2) DCIT, CIRCLE 2(3), HYDERABAD 3 DRP, HYDERABAD 4) DIT(INTERNATIONAL TAXATION), HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., H YDERABAD. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S. 2. DRAFT PLACED BEFORE AUTHOR SR.P.S 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER VP 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S. 6. KEPT FOR PRONOUNCEMENT ON SR.P S. 7. FILE SENT TO THE BENCH CLERK SR.P.S. 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER