DCIT, CHENNAI V. Horticultural & Construction Enginers (India) Pvt Limited, CHENNAI

ITA 363/CHNY/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8906 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 4 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-07-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 04-05-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 14-02-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K N DHANDAPANI
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Earning of tax free income; Proportionate interest; Wholly owned subsidiary
• Section: 143(3); 14A; 115JB

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , B B ENCH, CHENNAI . . . , . , & BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.363/MDS/2014 ( / ASSESSMENT YEAR: 2009-10) THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-II(2), 512, WANAPARTHY BLOCK, CHENNAI-34. VS M/S. HORTICULTURAL & CONSTRUCTION ENGINEERS (I) PVT.LTD. 29, HADDOWS ROAD, CHENNAI-600 006. PAN: AAACH0882N ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. K.N.DHANDAPANI, JCIT /RESPONDENT BY : MR. R.VIJAYARAGHAVAN, ADVOCATE /DATE OF HEARING : 4 TH MAY, 2016 /DATE OF PRONOUNCEMENT : 1 ST JULY, 2016 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THIS APPEAL IS FILED BY THE REVENUE AGGRIEVED BY TH E ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS)- II, CHENNAI DATED 28.10.2013 IN ITA NO.508/2013-14 PASSED UNDER SECTION 143(3) & 250(6) OF THE ACT. 2. THE REVENUE HAS RAISED SEVERAL GROUNDS IN ITS AP PEAL, HOWEVER THE CRUX OF THE ISSUE IS THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN RESTRICTING THE DISALLOWANCE MADE BY THE LEARNED AS SESSING 2 ITA NO.363 /MDS/2014 OFFICER TO ` 86,54,867/- AS AGAINST THE DISALLOWANCE OF RS. 1,23,26,926/- BEING EXPENDITURE TOWARDS INTEREST PA YMENTS UNDER SECTION 14A R.W.R 8D. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF CONSTRUC TIONS OF BUILDINGS, MAINTENANCE OF FACTORY PREMISES AND REND ERING CONSULTANCY SERVICES, FILED ITS RETURN OF INCOME FO R THE ASSESSMENT YEAR 2009-10 ON 30.09.2009 ADMITTING TOT AL LOSS OF ` 83,19,014/- AND BOOK LOSS OF ` 77,08,038/- UNDER SECTION 115JB OF THE ACT. SUBSEQUENTLY, THE CASE WAS TAKEN UP SCRUTINY AND ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE ACT ON 15.12.2011, WHEREIN THE LEARNE D ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SE CTION 14A OF THE ACT COMPUTED THE DISALLOWANCE IN ACCORDANCE WITH RULE 8D OF THE RULES AND THEREBY MADE AN ADDITION O F RS.1,23,26,926/-. THE REASON FOR INVOKING THE PROVI SIONS OF SECTION 14A IS BECAUSE THE ASSESSEE COMPANY HAD MAD E INVESTMENTS FROM WHICH EXEMPT INCOME WAS RECEIVABLE BUT THE ASSESSEE HAD NOT DISALLOWED ANY EXPENDITURE ATT RIBUTABLE TO SUCH INCOME AS PER PROVISIONS OF SECTION 14A OF THE ACT. THE ASSESSEES CONTENTION WAS THAT, IT HAD NOT INCU RRED ANY 3 ITA NO.363 /MDS/2014 EXPENDITURE FOR MAKING SUCH INVESTMENT WHICH THE LE ARNED ASSESSING OFFICER REJECTED. ON APPEAL THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) RESTRICTED THE DISALLOWANCE UNDER SECTION 14A R.W.R 8D TO ` 86,54,867/- AND DELETED THE DISALLOWANCE OF ` 36,72,059/-, BEING THE PROPORTIONATE INTEREST RELATED TO INTER-CORPORATE D EPOSITS TOWARDS WHICH PROVISIONS OF SECTION 14A WILL NOT BE APPLICABLE, AGAINST WHICH THE REVENUE IS IN APPEAL BEFORE US. 4. AT THE OUTSET THE LEARNED AUTHORIZED REPRESENTAT IVE SUBMITTED BEFORE US THAT MOST OF THE INVESTMENTS MA DE BY THE ASSESSEE COMPANY ARE IN SUBSIDY COMPANIES FOR S TRATEGIC REASONS. IT WAS THEREFORE SUBMITTED THAT WHILE COMP UTING THE DISALLOWANCE UNDER SECTION 14A R.W.R 8D OF THE ACT THE INVESTMENTS MADE IN SISTER CONCERNS FOR STRATEGIC R EASONS HAS TO BE EXCLUDED. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE O THER HAND, VEHEMENTLY OPPOSED TO THE SUBMISSIONS OF THE LEARNED AUTHORIZED REPRESENTATIVE AND ARGUED IN SUPPORT OF THE ORDER OF THE LEARNED ASSESSING OFFICER. 4 ITA NO.363 /MDS/2014 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y PERUSED THE MATERIALS PLACED BEFORE US. THE TRIBUNA L ON THE EARLIER OCCASION, IN THE CASE OF RANE HOLDINGS LTD. VS. ACIT IN ITA NO.115/MDS/2015 VIDE ORDER DATED 06.01.2016, EXTRACTED HEREIN BELOW, HAS HELD THAT, WHERE INVEST MENTS ARE MADE IN SISTER CONCERNS FOR STRATEGIC REASONS, NO E XPENSES CAN BE INFERRED TO HAVE BEEN INCURRED IF SUCH INVES TMENTS ARE MADE OUT OF NON-INTEREST BEARING FUNDS OF THE ASSES SEE. THE GIST OF THE RELEVANT ORDER IN ITA NO.115/MDS/2015 D ATED 06.01.2016 OF THIS TRIBUNAL IS REPRODUCED HEREIN BE LOW FOR REFERENCE:- 5. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PE RUSED THE MATERIALS AVAILABLE ON RECORD. ON THE IDENTICAL ISSUE AS POIN TED OUT BY THE LD. A.R. THE CHENNAI BENCH OF THE TRIBUNAL IN ITA NO.156/MDS /2013 VIDE ORDER DATED 20/08/13 FOR THE ASSESSMENT YEAR 2009-10 HAS REMITTED BACK THE MATTER TO THE LD. ASSESSING OFFICER TO DECIDE THE M ATTER ONCE AGAIN AFRESH BASED ON THE FINDINGS WHETHER THE ASSESSEE H AD ACTUALLY INCURRED ANY EXPENDITURE IN EARNING THE DIVIDEND INCOME. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED HEREIN BELOW FOR REFERENCE:- FURTHER, ON THE IDENTICAL ISSUE VARIOUS BENCHES OF THE TRIBUNAL AND THE HONBLE BOMBAY HIGH COURT HAVE HELD AS FOLLOWS:- I) GARWARE WALL ROPES LTD., VS. ACIT REPORTED IN (2014) 65 SOT 086 (MUM.) HELD AS FOLLOWS:- II) WHEN ASSESSEE HAS PRIMA FACIE BROUGHT OUT CASE THAT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING INCOME, W HICH DOES NOT FORM PART OF TOTAL INCOME, THEN IN ABSENCE OF A NY FINDING THAT 5 ITA NO.363 /MDS/2014 EXPENDITURE HAS BEEN INCURRED FOR EARNING EXEMPT IN COME PROVISIONS 14A CANNOT BE APPLIED.. III) INTEGLOBE ENTERPRISES LTD., VS. DCIT REPORTED 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 INT EREST EXPENDITURE WAS INCURRED FOR MAKING INVESTMENTS.WHE RE THE ASSESSEE HAD UTILIZED INTEREST FREE FUNDS FOR M AKING FRESH INVESTMENTS AND THAT TOO INTO ITS SUBSIDIARIE S, WHICH WAS NOT FOR THE PURPOSE OF EARNING EXEMPT INCOME AN D WHICH WAS FOR STRATEGIC PURPOSES ONLY, NO DISALLOWA NCE OF INTEREST WAS REQUIRED TO BE MADE UNDER RULE 8D(I) & 8D(II) AND STRATEGIC INVESTMENT HAS TO BE EXCLUDED FOR PUR POSE OF ARRIVING AT DISALLOWANCE UNDER RULE 8D(III). IV) M/S.JM FINANCIAL LTD., VS. ACIT REPORTED IN 201 4- 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 SUBSI DIARY COMPANIES OF THE ASSESSEE AND, THEREFORE, THE PURPO SE OF INVESTMENT IS NOT FOR EARNING THE DIVIDEND INCOME B UT 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 98% OF THE INVESTMENT MADE IN T HE SUBSIDIARY COMPANIES, THEREFORE, IN THE ABSENCE OF ANY FINDING THAT ANY EXPENDITURE HAS BEEN INCURRED FOR EARNING THE EXEMP T INCOME, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS NOT J USTIFIED, ACCORDINGLY THE SAME IS DELETED. (V) CIT VS. BHARTI TELEVENTURE LTD. REPORTED IN (20 11) 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 ASSESSE E AND THE ADVANCES GIVEN, NO DISALLOWANCE FOR INTEREST WAS CA LLED FOR . (VI) 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 WERE GENERATED IN THE COURSE OF THE RELEVANT FINANCIAL Y EAR, APART FROM SUBSTANTIAL SHAREHOLDERS FUND, PRESUMPTION STANDS E STABLISHED THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE B Y THE ASSESSEE OUT OF INTEREST FREE FUNDS AND THEREFORE NO PART OF INTEREST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WERE MADE OUT OF INTEREST BEARING FUNDS. (VII) EIH ASSOCIATED HOTELS LTD VS. DCIT REPORTED I N 2013- TIOL-796-ITAT-MAD 6 ITA NO.363 /MDS/2014 . THE INVESTMENTS MADE BY THE ASSESSEE IN THE SUB SIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNIN G CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAVE BEE N MADE BY THE ASSESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOTEL INDUSTRY. THE ASSESSEE IS NOT INTOTHE BUSINESS OF I NVESTMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EARNED BY THE ASSESSEE FRO M INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENTAL. THEREFO RE THE INVESTMENT MADE BY THE ASSESSEE IN ITS SUBSIDIARY I S NOT TO BE RECKONED FOR DISALLOWANCE U/S.14A R.W.R.8D. THE ASS ESSING OFFICER IS DIRECTED TO RE-COMPUTE THE AVERAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DELETING INVE STMENTS MADE BY THE ASSESSEE IN SUBSIDIARY COMPANY. TAKING NOTE OF THE ABOVE DECISIONS AND THE DECISION 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 ABOV E. WHILE DOING SO, WE ALSO DIRECT THE LD. ASSESSING OFFICER TO CONSIDER THE DECISION OF THE TRIBUNAL IN THE CASE M /S AGILE ELECTRIC SUB ASSEMBLY PVT. LTD. CITED SUPRA WHEREIN IT WAS HELD AS FOLLOWS:- 7.2 IN REGARD TO APPLICABILITY OF SECTION 14A OF THE ACT READ WITH RULE 8D ALSO; THE ABOVE VIEW WILL BE APPLICABL E. MOREOVER IN THE CASE EIH ASSOCIATED HOTELS LTD V. D CIT 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 T HE SUBSIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNING CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVE STMENTS HAVE BEEN MADE BY THE ASSESSEE TO PROMOTE SUBSIDIAR Y COMPANY INTO THE HOTEL INDUSTRY. A PERUSAL OF THE ORDER OF THE CIT(APPEALS) SHOWS THAT OUT OF TOTAL INVESTMENT OF RS.64,18,19,775/-, RS.63,31,25,715/- IS INVESTED IN WHOLLY OWNED SUBSIDIARY. THIS FACT SUPPORTS THE CASE OF TH E ASSESSEE THAT THE ASSESSEE IS NOT INTO THE BUSINESS OF INVES TMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EARNED BY THE ASSESSEE FRO M INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENT AL. THEREFORE, THE INVESTMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARY ARE NOT TO BE RECKONED FOR DISALLOWANCE 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 DELETING INVESTMENTS MADE BY THE ASSESSEE IN SUBSIDIARY COMPANY DECIDED IN FAVOUR OF ASSESSEE. 7 ITA NO.363 /MDS/2014 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. THEREFORE, FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, WE HEREBY DIRECT THE LEARNED ASSESSING OF FICER TO DELETE THE ADDITION MADE BY INVOKING THE PROVISI ONS OF SECTION 14A R.W. RULE 8D OF THE ACT, SUBJECT TO VERIFICATION THAT INVESTMENTS ARE MADE BY THE ASSES SEE IN ITS SISTER CONCERNS ONLY AND FROM ITS INTEREST F REE FUNDS. 7. SINCE THE LEARNED ASSESSEES REPRESENTATIVE HAS SUBMITTED BEFORE US THAT ALL THE INVESTMENTS MADE B Y THE ASSESSEE COMPANY ARE IN ITS SISTER CONCERNS FOR STR ATEGIC REASON, FOLLOWING THE ABOVE DECISION OF THE TRIBUNA L, WE HEREBY REMIT BACK THE MATTER TO THE FILE OF THE LEA RNED ASSESSING OFFICER WITH DIRECTIONS TO VERIFY WHETHE R THE INVESTMENTS MADE BY THE ASSESSEE COMPANY ARE IN ITS SISTER CONCERN / SUBSIDIARY COMPANY FOR STRATEGIC REASONS AND OUT OF NON-INTEREST BEARING FUNDS AND IF FOUND SO, EXCL UDE THEM FOR THE PURPOSE OF COMPUTING THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D OF THE RULES, HOWEVER, IF IT IS FOUND OTHERWISE, PASS APPROPRIATE ORDERS IN ACCORDANCE WI TH LAW & MERIT, AFTER PROVIDING SUFFICIENT OPPORTUNITY TO TH E ASSESSEE OF BEING HEARD. IT IS ORDERED ACCORDINGLY. 8 ITA NO.363 /MDS/2014 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES AS INDICATED HEREINABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON THE 1 ST JULY, 2016 SD/- SD/- ( . . . ) ( . ) (N.R.S.GANESAN) ( A.M OHAN ALANKAMONY ) # % / JUDICIAL MEMBER % / ACCOUNTANT MEMBER # /CHENNAI, ( /DATED 1 ST JULY, 2016 SOMU *+ ,+ /COPY TO: 1. APPELLANT 2. RESPONDENT 3. - () /CIT(A) 4. - /CIT 5. + 1 /DR 6. /GF