Lakshmi Electrical Drives Ltd., Coimbatore V. DCIT, Coimbatore

ITA 3114/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7417 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 07-11-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS
• Assessee Lawyers: K RAGHU
• Keywords: Business expenditure; Earning of tax free income; Wholly owned subsidiary
• Section: 143(3); 14A; 115JB

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , A B ENCH, CHENNAI . , ! . , % !& BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER, AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ ITA NO.3114/MDS/2016 / ASSESSMENT YEAR : 2011-12 LAKSHMI ELECTRICAL DRIVES LTD., 504, AVINASHI ROAD, PEELAMEDU, COIMBATORE 641 004. V. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-2, COIMBATORE PAN: AAACL5264Q ( /APPELLANT) ( /RESPONDENT) /APPELLANT BY : SHRI K. RAGHU, CA /RESPONDENT BY : SHRI SHIVA SRINIVAS, JCIT /DATE OF HEARING : 14.03.2017 /DATE OF PRONOUNCEMENT : 23.03.2017 / O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE ASSESSEE AGGRIEVED BY T HE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS), CO IMBATORE IN APPEAL NO.16/14-15 DATED 22.07.2016 PASSED U/S. 250 (6) R.W.S. 143(3) OF THE ACT. 2. THERE IS DELAY OF 7 DAYS IN FILING THE APPEAL AN D THE DIRECTOR OF THE COMPANY HAS FILED CONDONATION PETIT ION DATED 2 I.T.A. NO.3114/MDS/2016 16.12.2016, WHEREIN HE HAS STATED THAT THE DELAY HA D OCCURRED DUE TO THE MISTAKE ON THE PART OF THE STAFF OF THE APPELLANT IN UNDERSTANDING THE ORDER OF THE LD. CIT(A) WITH RESP ECT TO THE ISSUE OF DISALLOWANCE U/S.14A OF THE ACT READ WITH 8D OF THE RULES. IT WAS THEREFORE PLEADED THAT THE DELAY OF 7 DAYS IN F ILING THE APPEAL MAY BE CONDONED. THOUGH THE LD. DR VEHEMENTLY OPPO SED TO THE SUBMISSION OF THE ASSESSEE, AFTER CONSIDERING THE I SSUE INVOLVED IN THE APPEAL AND THE DELAY IN FILING THE APPEAL BEING SHORT, WE HEREBY CONDONE THE DELAY OF 7 DAYS IN FILING THE AP PEAL BY THE ASSESSEE AND PROCEED TO HEAR THE MATTER ON MERIT. 3. THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN ITS A PPEAL, HOWEVER THE CRUXES OF THE ISSUE ARE THAT:- I. THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISAL LOWANCE OF POOJA EXPENSES OF RS.21,594/- MADE BY THE LD. AO BY TREATING IT AS PERSONAL EXPENDITURE. II. THE LD. CIT(A) HAS ERRED IN INVOKING THE PROVIS IONS OF SECTION 14A READ WITH RULE 8D OF THE RULES AND THER EBY DISALLOWED THE NOTIONAL EXPENDITURE. (THIS GROUND W AS MODIFIED AT THE TIME OF ARGUMENT) 3 I.T.A. NO.3114/MDS/2016 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE OF E LECTRICAL MOTORS AND COTTON YARNS, FILED ITS RETURN OF INCOME ELECTRONICALLY ON 07.09.2011 FOR THE ASSESSMENT YEAR 2011-12 DECLARIN G TOTAL INCOME OF RS.12,28,96,229/- AND NET BOOK PROFIT OF RS.11,0 0,83,581/- U/S. 115JB OF THE ACT. INITIALLY THE RETURN WAS PROCESS ED U/S.143(1) OF THE ACT AND THEREAFTER THE CASE WAS SELECTED FOR SC RUTINY THROUGH CASS AND FINALLY ASSESSMENT WAS COMPLETED U/S.143(3 ) OF THE ACT ON 06.03.2014, WHEREIN AMONGST CERTAIN OTHER DISALL OWANCE THE LD.A.O MADE DISALLOWANCE OF RS.21,594/- TOWARDS POO JA EXPENSES AND RS.15,57,412/- INVOKING THE PROVISIONS OF SECTI ON 14A READ WITH RULE 8D OF THE RULES. 5. GROUND I: POOJA EXPENSES OF RS.21,594/- :- DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT W AS OBSERVED BY THE LD. AO THAT THE ASSESSEE HAD DEBITE D ITS PROFIT & LOSS ACCOUNT RS.21,594/- AS POOJA EXPENSES. THE LD . AO OPINED THAT THE POOJA EXPENSES CANNOT BE TREATED AS BUSINE SS EXPENDITURE AND COULD BE ONLY CONSIDERED AS PERSONAL EXPENDITUR E. THEREFORE HE DISALLOWED THE POOJA EXPENSES OF RS.21,594/- AND ADDED TO THE INCOME OF THE ASSESSEE. THE LD. CIT(A) ALSO CONFIR MED THE ADDITION 4 I.T.A. NO.3114/MDS/2016 BECAUSE THE ASSESSEE HAD NOT FURNISHED ANY DETAILS WITH RESPECT TO POOJA EXPENSES IN ORDER TO PROVE THAT IT IS NOT PER SONAL EXPENDITURE. WE DO NOT SUBSCRIBE TO THIS VIEW OF THE REVENUE AUT HORITIES. IN EVERY BUSINESS ESTABLISHMENT IT IS CUSTOMARY TO FOL LOW CERTAIN RELIGIOUS PROCEDURES IN ORDER TO PLEASE THE GODS FOR PROSPERITY AND DEVELOPMENT. CONSIDERING THE NATURE AND THE TURNOV ER OF THE BUSINESS, WE ARE OF THE CONSIDERED VIEW THAT THE AM OUNT SPENT BY THE ASSESSEE AS POOJA EXPENDITURE IS QUITE MEAGER A ND REASONABLE. THEREFORE, WE HEREBY DIRECT THE LD. AO TO DELETE TH E ADDITION OF RS.21.594/- MADE TOWARDS POOJA EXPENDITURE. 6. GROUND II: INVOKING OF SECTION 14A AND RULE 8D OF T HE RULES:- THE ASSESSEE HAD INVESTED RS.18.01 CRORES WHICH W OULD YIELD EXEMPT INCOME. THEREFORE THE LD. AO INVOKED THE PROVISIONS OF SECTION 14A AND RULE 8D OF THE RULES AND MADE AD DITION WHICH WAS SUBSEQUENTLY CONFIRMED BY THE LD. CIT(A). AT T HE OUTSET, THE LD. AR SUBMITTED BEFORE US THAT, THE ENTIRE INVESTM ENTS, FOR STRATEGICALLY REASONS, WAS MADE IN SUBSIDIARY COMPA NIES AND IT WAS SOURCED FROM INTEREST FREE FUNDS. THE LD. AR F URTHER ARGUED THAT ON SEVERAL OCCASIONS, THE CHENNAI BENCH OF THE TRIBUNAL HAS 5 I.T.A. NO.3114/MDS/2016 HELD THAT IF SUCH INVESTMENTS ARE MADE IN SISTER /S UBSIDIARY COMPANIES, THE PROVISIONS OF SECTION 14A CANNOT BE INVOKED. HE THEREFORE PLEADED THAT THE ADDITION MADE BY INVOKIN G THE PROVISIONS OF SECTION 14A OF THE ACT, MAY BE DELETE D. THE LD. DR THOUGH OPPOSED TO THE SUBMISSION OF THE LD. AR COUL D NOT SUCCESSFULLY CONTROVERT TO THE SUBMISSIONS. AFTER HEARING BOTH SIDES, WE FIND MERIT IN THE ARGUMENTS OF THE LD. AR . ON SEVERAL INSTANCE THIS BENCH OF THE TRIBUNAL HAS HELD AS WHA T WAS ARGUED BY THE LD. AR. FOR INSTANCE IN THE CASE OF M/S. DA TA SOFTWARE RESEARCH COMPANY (INTERNATIONAL) PVT. LTD. V. ACIT, ITA NOS.2169 & 2170/MDS/2015 AND ACIT V. M/S. DATA SOFTWARE RESE ARCH COMPANY (INTERNATIONAL) PVT. LTD., ITA NOS. 2171& 2 172/MDS/2015 VIDE ORDER DATED 03.02.2016, THIS BENCH OF THE TRIB UNAL HAS HELD AS FOLLOWS: 7. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PE RUSED THE MATERIALS AVAILABLE ON RECORD. IT IS A NORMAL P RACTICE TO MAKE INVESTMENT IN SISTER COMPANIES DUE TO COMME RCIAL EXIGENCIES. WHILE DOING SO, NO EXPENSE CAN BE ATTRIBUTABLE OTHER THAN INTEREST EXPENSE FOR MAKING SUCH INVESTMENTS BECAUSE ALL MANAGEMENT COSTS WILL BE ABSORBED FOR STRATEGIC DECISION MAKING PROCESS WHIC H IS ALLOWABLE AS BUSINESS EXPENDITURE. IN THE CASE OF THE ASSESSEE IT IS SUBMITTED THAT NO INTEREST COST WAS INCURRED AS THE ENTIRE INVESTMENTS WERE MADE OUT OF OWN FUND S. FURTHER IN THE DECISION OF THE TRIBUNAL IN ITA NO.115/MDS/2015 DATED 06.01.2016, EXTRACTED HEREIN 6 I.T.A. NO.3114/MDS/2016 BELOW, IT HAS BEEN HELD THAT SECTION 14A OF THE ACT WILL NOT BE APPLICABLE WHEN INVESTMENTS ARE MADE IN SISTER COMPANIES. 5. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PERUSED THE MATERIALS AVAILABLE ON RECORD. ON THE IDENTICA L ISSUE AS POINTED OUT BY THE LD. A.R. THE CHENNAI BENCH OF TH E TRIBUNAL IN ITA NO.156/MDS/2013 VIDE ORDER DATED 20/08/13 FOR T HE ASSESSMENT YEAR 2009-10 HAS REMITTED BACK THE MATTE R TO THE LD. ASSESSING OFFICER TO DECIDE THE MATTER ONCE AGA IN AFRESH BASED ON THE FINDINGS WHETHER THE ASSESSEE HAD ACTU ALLY INCURRED ANY EXPENDITURE IN EARNING THE DIVIDEND IN COME. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED HEREIN B ELOW FOR REFERENCE:- FURTHER, ON THE IDENTICAL ISSUE VARIOUS BENCHES OF THE TRIBUNAL AND THE HONBLE BOMBAY HIGH COURT HAVE HELD AS FOLL OWS:- I) GARWARE WALL ROPES LTD., VS. ACIT REPORTED IN (2014) 65 SOT 086 (MUM.) HELD AS FOLLOWS:- WHEN ASSESSEE HAS PRIMA FACIE BROUGHT OUT CASE THA T NO EXPENDITURE HAS BEEN INCURRED FOR EARNING INCOME, W HICH DOES NOT FORM PART OF TOTAL INCOME, THEN IN ABSENCE OF ANY F INDING THAT EXPENDITURE HAS BEEN INCURRED FOR EARNING EXEMPT IN COME PROVISIONS 14A CANNOT BE APPLIED.. II) INTEGLOBE ENTERPRIESES LTD., VS. DCIT REPOTED IN (2014) 40 CCH 0022(DEL. TRIB.) HELD AS FOLLOWS:- NO DISALLOWANCE OF INTEREST IS REQUIRED TO BE MADE UNDER RULE 8D(I) & 8D(II) WHERE NO DIRECT OR INDIRECT INTEREST EXPENDI TURE WAS INCURRED FOR MAKING INVESTMENTS. WHERE THE ASSESSEE HAD UTILIZED INTEREST FREE FUNDS FOR MAKING FRESH INVESTMENTS AND THAT TOO INTO ITS SUBSIDIARIES, WHI CH WAS NOT FOR THE PURPOSE OF EARNING EXEMPT INCOME AND WHICH WAS FOR STRATEGIC PURPOSES ONLY, NO DISALLOWANCE OF INTEREST WAS REQU IRED TO BE MADE UNDER RULE 8D(I) & 8D(II) AND STRATEGIC INVESTMENT HAS TO BE EXCLUDED FOR PURPOSE OF ARRIVING AT DISALLOWANCE UNDER RULE 8D(III). III) M/S.JM FINANCIAL LTD., VS. ACIT REPORTED IN 2 014-TIOL-202- ITAT-MUM HELD AS FOLLOWS: THE DEPARTMENT HAS NOT DISPUTED THIS FACT OUT OF THE TOTAL INVESTMENT ABOUT 98% OF THE INVESTMENT ARE IN SUBSIDIARY COMPA NIES OF THE ASSESSEE AND, THEREFORE, THE PURPOSE OF INVESTMENT IS NOT FOR EARNING THE DIVIDEND INCOME BUT HAVING CONTROL AND BUSINESS PURPOSE AND CONSIDERATION. THE ASSESSEE HAS BROUGHT OUT A CASE TO SHOW THAT NO EXPENDITURE HAS BEEN INCURRED FOR MAINTAINING THE 9 8% OF THE 7 I.T.A. NO.3114/MDS/2016 INVESTMENT MADE IN THE SUBSIDIARY COMPANIES, THEREF ORE, IN THE ABSENCE OF ANY FINDING THAT ANY EXPENDITURE HAS BEE N INCURRED FOR EARNING THE EXEMPT INCOME, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS NOT JUSTIFIED, ACCORDINGLY THE SAME IS D ELETED. (IV) CIT VS. BHARTI TELEVENTURE LTD. REPORTED IN (2 011) 331 ITR 0502. WHERE THE ASSESSEE WAS FOUND TO BE HAVING ADEQUATE NON- INTEREST BEARING FUND BY WAY OF SHARE CAPITAL AND R ESERVES AND THERE WAS NO NEXUS BETWEEN THE BORROWALS OF ASSESSEE AND THE ADVANCES GIVEN, NO DISALLOWANCE FOR INTEREST WAS CALLED FOR . (V) CIT VS. RELIANCE UTILITIES & POWER LTD., REPOR TED IN (2009) 313 ITR 0340(BOM.) HAS HELD AS FOLLOWS:- TRIBUNAL HAVING RECORDED A CLEAR FINDING THAT THE ASSESSEE POSSESSED SUFFICIENT INTEREST-FREE FUNDS OF ITS OWN WHICH WER E GENERATED IN THE COURSE OF THE RELEVANT FINANCIAL YEAR, APART FROM S UBSTANTIAL SHAREHOLDERS FUND, PRESUMPTION STANDS ESTABLISHED T HAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE BY THE ASS ESSEE OUT OF INTEREST FREE FUNDS AND THEREFORE NO PART OF INTERE ST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WER E MADE OUT OF INTEREST BEARING FUNDS. (VI) EIH ASSOCIATED HOTELS LTD VS. DCIT REPORTED I N 2013-TIOL- 796-ITAT-MAD . THE INVESTMENTS MADE BY THE ASSESSEE IN THE SU BSIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNIN G CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEEN MADE BY THE ASSESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOTEL INDUST RY. THE ASSESSEE IS NOT INTO THE BUSINESS OF INVESTMENT AND THE INVE STMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EARNED BY THE ASSESSEE FROM INVESTMENT IN SUBSIDIAR Y COMPANY IS PURELY INCIDENTAL. THEREFORE THE INVESTMENT MADE BY THE ASSESSEE IN ITS SUBSIDIARY IS NOT TO BE RECKONED FOR DISALLOWAN CE U/S.14A R.W.R.8D. THE ASSESSING OFFICER IS DIRECTED TO RE-COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DE LETING INVESTMENTS MADE BY THE ASSESSEE IN SUBSIDIARY COMPANY. TAKING NOTE OF THE ABOVE DECISIONS AND THE DECISI ON OF THE CHENNAI BENCH OF THE TRIBUNAL IN ITA NO.156/MDS /13 CITED SUPRA, WE HEREBY REMIT THE MATTER BACK TO THE FILE OF LD. ASSESSING OFFICER TO EXAMINE THE ISSUE INVOLVED IN THIS CASE AFRESH AND PASS APPROPRIATE ORDER AS PER LAW AND ME RITS AND IN THE LIGHT OF THE DECISIONS CITED HEREIN ABOVE. WHIL E DOING SO, WE ALSO DIRECT THE LD. ASSESSING OFFICER TO CONSIDER T HE DECISION OF THE TRIBUNAL IN THE CASE M/S AGILE ELECTRIC SUB ASS EMBLY PVT. LTD. CITED SUPRA WHEREIN IT WAS HELD AS FOLLOWS:- 8 I.T.A. NO.3114/MDS/2016 7.2 IN REGARD TO APPLICABILITY OF SECTION 14A OF THE ACT READ WITH RULE 8D ALSO; THE ABOVE VIEW WILL BE APPLICABLE. M OREOVER IN THE CASE EIH ASSOCIATED HOTELS LTD V. DCIT REPORTED IN 2013 (9) TMI 604 IN ITA NO.1503, 1624/MDS/2012 DATED 17 TH JULY, 2013, IT HAS BEEN HELD BY THE CHENNAI BENCH OF THE TRIBUNAL AS FOLLOWS:- DISALLOWANCE U/S. 14A RW RULE 8D CIT UPHELD DISAL LOWANCE HELD THAT INVESTMENTS MADE BY THE ASSESSEE IN THE SUBS IDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNING CAPITA L GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEEN MADE BY THE ASS ESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOTEL INDUSTRY. A PERUSAL OF THE ORDER OF THE CIT(APPEALS) SHOWS THAT OUT OF TOTAL I NVESTMENT OF RS.64,18,19,775/-, RS.63,31,25,715/- IS INVESTED IN WHOLLY OWNED SUBSIDIARY. THIS FACT SUPPORTS THE CASE OF THE ASS ESSEE THAT THE ASSESSEE IS NOT INTO THE BUSINESS OF INVESTMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXP EDIENCY. ANY DIVIDEND EARNED BY THE ASSESSEE FROM INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENTAL. THEREFORE, THE INVES TMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARY ARE NOT TO BE RECKONED F OR DISALLOWANCE U/S. 14A R.W.R. 8D. THE ASSESSING OFFICER IS DIRECTED T O RE-COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DELETING INVESTMENTS MADE BY THE ASSESSEE IN SUBSID IARY COMPANY DECIDED IN FAVOUR OF ASSESSEE. FOR THE ABOVE SAID REASONS, WE HEREBY HOLD THAT IN THE CASE OF THE ASSESSEE THE PROVISIONS OF SECTION 14A READ WITH RU LE 8D WILL NOT BE APPLICABLE IN REGARD TO INVESTMENTS MADE FOR ACQUIR ING THE SHARES OF THE ASSESSEES SISTER CONCERNS. ACCORDINGLY WE REST RAIN OURSELVES FROM INTERFERING WITH THE ORDER OF THE LD.CIT(A) ON THIS REGARD. 8. THEREFORE, FOLLOWING THE AFORESAID DECISION OF T HE TRIBUNAL, WE HEREBY DIRECT THE LEARNED ASSESSING OF FICER TO DELETE THE ADDITION MADE ON ACCOUNT OF SECTION 1 4A WHERE INVESTMENTS ARE MADE IN SISTER CONCERNS SUCH AS EQUITY SHARES AND SHARE APPLICATION MONEY. HOWEVER, IF THE INVESTMENTS ARE MADE FROM BORROWED FUNDS, SECTI ON 14A OF THE ACT WOULD BE APPLICABLE AND LEARNED ASSE SSING OFFICER SHALL COMPUTE THE DISALLOWANCE UNDER SECTIO N 14A READ WITH RULE 8D IN ACCORDANCE WITH LAW. 6.1 ACCORDINGLY WE HEREBY REMIT BACK THE MATTER TO THE FILE OF THE LD. AO TO CONSIDER THE ISSUE AFRESH IN THE LIGHT OF THE ABOVE ORDER OF THE TRIBUNAL AND PASS APPROPRIATE ORDER IN ACCORDAN CE WITH MERITS 9 I.T.A. NO.3114/MDS/2016 AND LAW. WE ALSO MAKE IT CLEAR THAT FOR THE INVEST MENTS MADE IN MUTUAL FUNDS, PROVISIONS OF SECTION 14A READ WITH R ULE 8D WILL BE APPLICABLE SINCE THE ASSESSEE WOULD INCUR SOME EXPE NDITURE AT LEAST FOR THE DECISION MAKING PROCESS AS TO IN WHIC H MUTUAL FUND THE INVESTMENT HAS TO BE MADE AND AT WHAT POINT OF TIME EXIT FROM SUCH FUNDS. IT IS ORDERED ACCORDINGLY. 7. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 23 RD MARCH, 2017 AT CHENNAI. SD/- SD/- ( . ) )) ) (G. PAVAN KUMAR) /JUDICIAL MEMBER ( . ) (A. MOHAN ALANKAMONY) / ACCOUNTANT MEMBER /CHENNAI, /DATED, THE 23 RD MARCH, 2017. JR. /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. ( )/CIT(A) 4. /CIT, 5. /DR 6. /GF.