Madhucon Infra Ltd., Hyd, Hyderabad V. ACIT, Central Circle-3, Hyd, Hyderabad

ITA 410/HYD/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6551 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 25-04-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 15-04-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NIVEDITA BISWAS
• Assessee Lawyers: P MURALI MOHAN
• Keywords: Earning of tax free income; Commercial expediency
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 410/HYD/2015 ASSESSMENT YEAR: 2011-12 MADHUCON INFRA LTD., HYDERABAD PAN AAECM 6443Q VS. ASST. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 3, HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI P. MURALI MOHAN REVENUE BY : SMT. NIVEDITA BISWAS DATE OF HEARING 25-04-2016 DATE OF PRONOUNCEMENT 20-05-2016 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS) - 12, HYDE RABAD, DATED 29/01/2015 FOR AY 2011-12. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E HAS FILED RETURN OF INCOME FOR AY 2011-12 ON 29/09/2012 DECLA RING A LOSS OF RS. (-) 21,56,83,227/-. ON PERUSAL OF THE SCHEDULES FOR MING PART OF THE CERTIFIED BALANCE SHEET, THE AO NOTED THAT THE ASSE SSEE COMPANY HAD INCURRED PRELIMINARY EXPENDITURE TO THE TUNE OF RS. 32,32,610/- FOR THE AY 2010-11. THE AO OBSERVED THAT THE ASSESSEE HAS C LAIMED A DEDUCTION OF RS. 42,26,322/- IN THE COMPUTATION OF INCOME AS AGAINST THE ALLOWABLE DEDUCTION U/S 35D OF RS. 3,23,261/-. HE, THEREFORE, ADDED THE DIFFERENCE AMOUNT OF RS. 39,03,061/- TO T HE TOTAL INCOME OF THE ASSESSEE AS EXCESS CLAIMED. 2 ITA NO. 410/H/15 MADHUCON INFRA LTD. 2.1 AO FOUND FROM THE SCHEDULES FORMING PART OF THE BALANCE SHEET AS PER ENCLOSURE II CLAUSE 17(1), THE ASSESSEE HAD AVAILED LOANS FROM VARIOUS FINANCIAL INSTITUTIONS AND INVESTED IN VARIOUS SUBSIDIARIES. OBSERVING THAT AS THE INTEREST ATTRI BUTED TO INVESTMENTS MADE IS NOT ELIGIBLE FOR DEDUCTION, WHICH IS ALSO C ERTIFIED BY THE AUDITOR, AN AMOUNT OF RS. 18,83,08,080/- WAS DISALL OWED U/S 14A OF THE ACT BY THE AO. 2.2 THE ASSESSEE RELYING ON THE JUDGMENT OF THE HON BLE SUPREME COURT IN THE CASE OF SA BUILDERS VS. CIT, 288 ITR 1 , HAS OPINED THAT THE INTEREST EXPENSE ON BORROWED CAPITAL FOR INVEST ING IN THE SUBSIDIARIES IS AN ALLOWABLE EXPENSE. THE AO OBSERV ED THAT THE SAID CASE IS NOT APPLICABLE TO THE CASE OF THE ASSESSEE AS THE SAID CASE CLARIFIES REGARDING ALLOWABILITY U/S 36(1)(III), HO WEVER, IN THE INSTANT CASE, THE ASSESSEE COMPANY HAD INVESTED IN THE SUBS IDIARY COMPANIES AND THE DISALLOWANCE OF INTEREST IS UNDER SECTION 14A OF THE ACT. HE ACCORDINGLY DETERMINED THE ASSESSED INC OME (-) RS. 2,34,72,086/- AS AGAINST THE LOSS OF RS. (-) 21,56, 83,227/- DECLARED BY THE ASSESSEE IN THE RETURN OF INCOME. 3. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFO RE THE CIT(A). 4. AS REGARDS THE DISALLOWANCE U/S 35D, THE CIT(A) FOLLOWING THE APPELLATE ORDER FOR AY 2010-11, CONFIRMED THE DISAL LOWANCE MADE BY THE AO. 5. AS REGARDS THE DISALLOWANCE OF INTEREST TO THE T UNE OF RS. 18,83,08,080/- U/S 14A OF THE IT ACT, BEFORE THE CI T(A), THE ASSESSEE STATED AS UNDER: A) THOUGH THE CA AUDIT REPORT MENTIONED THIS ITEM, HE HAD QUALIFIED THE ABOVE. 3 ITA NO. 410/H/15 MADHUCON INFRA LTD. B) PART OF THE AMOUNTS BORROWED WAS INVESTED IN THE SUBSIDIARY COMPANIES AND THE SAME IS MADE WHOLLY AND EXCLUSIVE LY FOR THE BUSINESS OF EXPEDIENCY OF THE ASSESSEE COMPANY. C) THE ASSESSEE COMPANY AND THE SISTER COMPANIES, I N WHOSE EQUITY SHARES, INVESTMENT WAS MADE, ARE INTERDEPEND ENT AND HAVE TRADE RELATION WITH EACH OTHER. SURVIVAL OF TH E COMPANIES IS ON MUTUAL DEPENDENCY. D) IT CANNOT BE THEREFORE BE SAID THAT THE INVESTME NT IS MADE FOR EARNING INCOME WHICH IS EXEMPT FROM TAX, SO AS TO A TTRACT THE MISCHIEF OF THE PROVISIONS OF SECTION 14A OF THE AC T. SINCE THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY INCURRED FOR BUSINESS EXPEDIENCY OF THE ASSESSEE, THE SAME IS ALLOWABLE U /S 36(1)(III) OF THE I.T. ACT. E) THE ASSESSEE FINALLY SUBMITTED THAT THE FACTS AN D ITS CASE DIRECTLY INTO THE CASE ADJUDICATED BY THE HONBLE SU PREME COURT IN THE CASE OF SA BUILDERS. 6. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, THE CIT(A) OBSERVED THAT OTHER THAN QUOTING THE SUPREME COURT ORDER, THE ASSESSEE HAD NOT BROUGHT OUT EVEN THE NAMES OF THE SISTER CONCERNS AND IN WHAT WAY THE INVESTMENT OF RS. 2114 CRORES O UT OF BORROWED MONEY IS GOING TO BENEFIT THE ASSESSEE AND WHAT THE COMMERCIAL EXPEDIENCY WAS. HE FURTHER OBSERVED THAT FROM THE T AX AUDIT REPORT, ONE CAN SEE THAT THE ASSESSEE INVESTED RS.2,000 CR ORES IN SEPL AND ANOTHER RS.113. 23 CRORES IN OTHER SUBSIDIARY COMPA NIES. THE IDENTITY OF THESE COMPANIES IS NOT KNOWN. THE TOTAL INTEREST WAS MORE THAN RS.18 CRORES. WITHOUT ESTABLISHING THE ACTUAL BUSIN ESS OF THESE SUBSIDIARIES, THE PURPOSE AND MORE IMPORTANTLY WITH OUT ESTABLISHING THE MANNER IN WHICH THE INVESTMENT IN THE SUBSIDIAR Y COMPANIES WOULD PROMOTE THE BUSINESS OF THE ASSESSEE AND THER EBY SERVE ITS COMMERCIAL PURPOSE, THE DEDUCTION CANNOT BE ALLOWED . 4 ITA NO. 410/H/15 MADHUCON INFRA LTD. 6.1 THE CIT(A) OBSERVED THAT THE ASSESSEE INVESTED NEARLY RS. 2114 CRORES IN THE EQUITY CAPITAL OF THE SUBSIDIARY COMPANIES AND FROM WHICH THE ONLY EXPECTED RETURN IS DIVIDEND. HE EMPHASIZED THAT THE BOTH THE TAX AUDIT AND THE AO HAVE RIGHTLY INVO KED THE PROVISIONS OF SECTION 14A. IN VIEW OF THE ABOVE OBSERVATIONS, HE CONFIRMED THE ACTION OF THE AO ON THIS ISSUE. 7. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE LD. CIT(A) XII, HYDERABAD IS ER RONEOUS BOTH ON FACTS AND IN LAW. 2. THE LD. CIT(A) XII, OUGHT TO HAVE ALLOWED THE C LAIM OF RS. 39,03,061/ - TOWARDS DEDUCTION U/S 35D OF THE ACT. 3. THE LD. CIT (A), OUGHT TO HAVE APPRECIATED THAT THE APPELLANT HAS INVESTED IN ITS SUBSIDIARIES FOR THE PURPOSE OF EXPANSION OF THE BUSINESS, WHICH DO NOT HAVE ANY EX EMPTED INCOME AND HENCE THE PROVISIONS OF SEC 14A ARE NOT APPLICABLE TO THE APPELLANT. 4. THE LD. CIT (A) XII OUGHT TO HAVE FOLLOWED THE D ECISION OF HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS VS. CIT IN 288 ITR, FOR ALLOWING THE INTEREST EXPENDITURE INCU RRED ON BORROWALS MADE FOR THE PURPOSE OF INVESTMENTS IN IT S SUBSIDIARIES, AND TO HAVE APPRECIATED THAT THE PROV ISIONS OF SEC 14A ARE NOT APPLICABLE TO THE ASSESSEE. 8. THE LD. AR SUBMITTED THAT ASSESSEE DOES NOT WANT TO PRESS GROUND NO. 2 AND WITH REGARD TO GROUND NO. 3, HE SU BMITTED THAT AO HAS DISALLOWED RS. 18,83,08,080/- U/S 14A OF THE AC T, WHEREAS, ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME DURING TH E YEAR. HE SUBMITTED THAT WHEN THERE IS NO EXEMPT INCOME, WHIC H DO NOT FORM PART OF TOTAL INCOME, AO CANNOT DISALLOW THE EXPEND ITURE U/S 14A OF THE ACT. FOR THIS PROPOSITION, HE RELIED ON THE FOL LOWING CASES: 1. ACIT VS. MISHRA DHATU NIGAM LTD., ITA NO. 471/H /2015. 2. CHEMINVEST LTD. VS. CIT, 61 TAXMANN 118 (DELHI HC) 3. CIT VS. CORRTECH ENERGY PVT. LTD., 45 TAXMANN 116 (HC- GUJ.) 4. REI AGRO LTD. VS. DCIT, 35 TAXMANN.404 (ITAT-KO L.) 5. ACB INDIA LTD. VS. ACIT, 62 TAXMANN. 71 (DELHI HC) 6. ATHENA ENERGY VENTURES P. LTD., ITA NO. 3456/DE L/2013 5 ITA NO. 410/H/15 MADHUCON INFRA LTD. 7. ALLIANCE INFRASTRUCTURES PROJECTS PVT. LTD., 22 0/BANG/2013 9. THE LD. DR SUBMITTED THAT THE TAX AUDITOR OF THE COMPANY HAS CLEARLY DISCLOSED IN HIS AUDIT REPORT 3CD, PROPORT ION OF INTEREST RELATING TO INVESTMENT MADE IN THE SUBSIDIARY COMPA NIES AND HE RELIED ON THE ORDER OF THE AO. 10. CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL FACTS ON RECORD AS WELL AS THE ORDERS OF R EVENUE AUTHORITIES. WE HAVE ALSO GONE THROUGH THE CASES CITED BY THE LD . AR. IN THE CASE OF M/S ALLIANCE INFRASTRUCTURE PROJECTS PVT. LTD., (SUPRA), THE COORDINATE BENCH OF ITAT BANGALORE HAS HELD AS UNDE R: 14. THEREFORE, UNLESS AND UNTIL, THERE IS RECEIPT OF EXEMPTED INCOME FOR THE CONCERNED ASSESSMENT YEARS, WE ARE O F THE VIEW, SECTION 14A OF THE ACT CANNOT BE INVOKED. IN THIS A PPEAL, THE REVENUE HAS NOT DISPELLED THE CONTENTION OF THE ASS ESSEE BEFORE AO THAT IT WAS NOT IN RECEIPT OF ANY EXEMPT INCOME. LEARNED CIT(A), HAS MISCONSTRUED THE DECISION OF DELHI BENC H OF THIS TRIBUNAL IN THE CASE OF MIS TECHNOPAK ADVISORS (P) LTD., AS THAT OF THE HON' DELHI HIGH COURT, WITHOUT RECOGNIZING T HAT AFTER THE SAID DECISION, THERE HAS BEEN A CATENA OF JUDGMENTS FROM VARIOUS HIGH COURTS, GOING IN FAVOUR OF THE ASSESSEE. HENCE ACCORDING TO US, THE ASSESSING OFFICER HAS ERRED IN INVOKING SEC TION 14A OF THE ACT. 10.1 IN THE CASE OF ACIT VS. M/S MISHRA DHATU NIGAM LTD., (SUPRA), THE COORDINATE BENCH OF ITAT, HYDERABAD HAS HELD AS UNDER: 8. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. THOUGH, LD. DR REL YING UPON THE DECISION OF ITAT DELHI SPECIAL BENCH IN CASE OF CHE MINVEST LTD. VS. ITO (SUPRA), ATTEMPTED TO JUSTIFY THE DISALLOWA NCE MADE U/S 14A, HOWEVER, ON CAREFUL ANALYSIS OF THE DECISIONS CITED BY ASSESSEE INCLUDING THE DECISION OF THE HONBLE P&H HIGH COURT IN CASE OF CIT VS. M/S LAKHANI MARKETING INC. IN ITA N O. 970 OF 2008 DATED 02/04/2014, WE FIND THAT THE PRINCIPLE L AID DOWN BY DIFFERENT HIGH COURTS ARE TO THE EFFECT THAT UNLES S ASSESSEE HAS EARNED EXEMPT INCOME IN A PARTICULAR FY, PROVISIONS OF SECTION 14A WILL NOT APPLY. IN VIEW OF THE AFORESAID, WE DO NOT FIND ANY MERIT IN THE GROUND RAISED BY THE DEPARTMENT. ACCOR DINGLY, WE DISMISS THE SAME BY UPHOLDING THE ORDER OF LD. CIT( A) ON THIS ISSUE. 6 ITA NO. 410/H/15 MADHUCON INFRA LTD. 10.3 IN THE CASE OF CIT VS. CORRTECH ENERGY (P) LTD ., (SUPRA), THE HONBLE GUJARAT HIGH COURT HAS HELD AS UNDER: 4. COUNSEL FOR THE REVENUE SUBMITTED THAT THE ASSE SSING OFFICER AS WELL AS CIT (APPEALS) HAD APPLIED FORMULA OF RUL E 8D OF THE INCOME TAX RULES, SINCE THIS CASE AROSE AFTER THE A SSESSMENT YEAR 2009-2010. SINCE IN THE PRESENT CASE, WE ARE C ONCERNED WITH THE ASSESSMENT YEAR 2009-2010, SUCH FORMULA WA S CORRECTLY APPLIED BY THE REVENUE. WE HOWEVER, NOTICE THAT SUB -SECTION(1) OF SECTION 14A PROVIDES THAT FOR THE PURPOSE OF COM PUTING TOTAL INCOME UNDER CHAPTER IV OF THE ACT, NO DEDUCTION SH ALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE A SSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN THE PRESENT CASE, THE TRIBUNAL HA S RECORDED THE FINDING OF FACT THAT THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION OF ANY INCOME FROM PAYMENT OF TAX. IT WAS ON THIS BASIS THAT THE TRIBUNAL HELD THAT DISALLOWANCE UNDE R SECTION 14A OF THE ACT COULD NOT BE MADE. IN THE PROCESS TRIBUN AL RELIED ON THE DECISION OF DIVISION BENCH OF PUNJAB AND HARYAN A HIGH COURT IN CASE OF CIT V WINSOME TEXTILE INDUSTRIES LTD. [2 009] 319 ITR 204 IN WHICH ALSO THE COURT HAD OBSERVED AS UNDER: '7. WE DO NOT FIND ANY MERIT IN THIS SUBMISSION. T HE JUDGEMENT OF THIS COURT IN ABHISHEK INDUSTRIES LTD (2006) 28 6 ITR 1 WAS ON THE ISSUE OF ALLOWABILITY OF INTEREST PAID ON LOANS GIVEN TO SISTER CONCERNS, WITHOUT INTEREST. IT WAS HELD THAT DEDUCT ION FOR INTEREST WAS PERMISSIBLE WHEN LOAN WAS TAKEN FOR BUSINESS PU RPOSE AND NOT FOR DIVERTING THE SAME TO SISTER CONCERN WITHOU T HAVING NEXUS WITH THE BUSINESS. THE OBSERVATIONS MADE THEREIN HA VE TO BE READ IN THAT CONTEXT. IN THE PRESENT CASE, ADMITTED LY THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION. IN SUCH A SIT UATION SECTION 14A COULD HAVE NO APPLICATION.' 10.3 RESPECTFULLY FOLLOWING THE ABOVE DECISIONS, WE SET ASIDE THE ORDER OF THE CIT(A) AND ALLOW THE GROUND NOS. 3 & 4 RAISED BY THE ASSESSEE. 10.4 SINCE GROUND NO.2 WAS NOT PRESSED BY THE ASSE SSEE, THE SAME IS DISMISSED AS NOT PRESSED. 7 ITA NO. 410/H/15 MADHUCON INFRA LTD. 11. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 20 TH MAY, 2016. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAHM AN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 20 TH MAY, 2016 KV COPY TO:- 1) MADHUCON INFRA LTD.,C/O P. MURALI & CO., CAS., 6-3-655/2/3, 1 ST FLOOR, SOMAJIGUDA, HYDERABAD 500 082. 2) ACIT, CENTRAL CIRCLE 3, HYDERABAD 3 CIT(A) - 12, HYDERABAD 4) CIT(CENTRAL), HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.