DCIT (LTU), New Delhi V. M/s. Hero Motors Ltd., New Delhi

ITA 4316/DEL/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 3170 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 9 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-05-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 08-05-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 07-08-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAVI JAIN
• Assessee Lawyers: SUMIT KUMAR BANSAL
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

1 ITA NO. 4316/DEL/2014 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: C NEW DELHI BEFORE SHRI N. K. SAINI, ACCOUNTANT MEM BER AND MS SUCHITRA KAMBLE, JUDI CIAL MEMBER I.T.A .NO.431 6/DEL/2014 (ASSESSMENT Y EAR-2010-11) DCIT (LTU) NBCC, PLAZA, PUSHP VIHAR, SECTOR-III NEW DELHI (APPELLANT) VS HERO MOTORS LTD. 603, INTERNATIONAL TRADE TOWER, NEHRU PLACE NEW DELHI AAACH8459F (RESPONDENT) APPELLANT BY SH. RAVI JAIN, CIT DR RESPONDENT BY SH. SUMIT KUMAR BANSAL, FCA ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED BY THE RESPONDENT AGAINST THE ORDER DATED 30/5/2014 PASSED BY CIT(A)-LTU, NEW DELHI. 2. THE GROUNDS OF APPEAL ARE AS UNDER:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD.CIT(A) HAS ERRED IN DIRECTING TO EXCLUDE THE AMOUNT OF RS. 87,38,06,716/- (BEING INVESTMENTS MADE BY THE ASSESSEE IN M/S MUNJ AL KIRIU INDUSTRIES (P) LTD, M/S HERO CHASSIS SYSTEM (P) LTD . AND M/S HERO GLOBAL DESIGN LTD.) FOR WORKING OUT THE AMOUNT OF A VERAGE AND INVESTMENT FOR THE PURPOSE OF COMPUTATION OF DISALL OWANCE U/S 14A, DATE OF HEARING 09.05.2017 DATE OF PRONOUNCEMENT 15.05.2017 2 ITA NO. 4316/DEL/2014 BY HOLDING THAT THERE IS NO NEXUS BETWEEN THE INTER EST PAID BY THE APPELLANT AND THE INVESTMENTS MADE IN THESE COMPANI ES. 3. THE BRIEF FACTS ARE AS UNDER:- DURING THE ASSESSMENT YEAR THE ASSESSING OFFICER OB SERVED THAT THE ASSESSEE HAS INVESTED RS.88,26,71,955/- IN THE ASSETS WHICH WILL RESULT IN TAX EXEMPT INCOME. THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY DISALLOWANCE U/S 14A SHOULD NOT BE MADE. THE ASSESSEE SUBMITTED THE REPLY. AFTER GOING THROUGH THE SUBMISSIONS OF THE ASSESSEE, THE AO OBS ERVED THAT THE ASSESSEE NEVER KEPT THE TWO BUSINESS ACTIVITIES VIZ EXEMPT I NCOME EARNING ACTIVITY AND OTHER REGULAR BUSINESS ACTIVITY SEPARATE NOR ITSELF GIVEN A WORKING FOR ALLOCATING EXPENSES TO EXEMPT INCOME. WHEN ASSESSEE HAS SUCH T YPE OF BUSINESS ARRANGEMENT, WHERE IT IS DIFFICULT TO SEGREGATE THE TWO TYPES OF BUSINESS I.E. EXEMPT INCOME EARNING ACTIVITY AND OTHER BUSINESS, FOR ATTRIBUTING EXPENSES TO EXEMPT INCOME, THE RULE 8D IS APPLICABLE. THUS, THE ASSESSING OFFICER REJECTED THE CLAIM OF THE ASSESSEE AND EXPENSES ATTRIBUTABLE TO EXEMPT INCOME WAS COMPUTED AS PER RULE 8D OF THE INCOME TAX RULES, 19 62. THUS, THE ASSESSING OFFICER DISALLOWED RS. 4,77,63,602/- AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. 4. AGGRIEVED BY THE ABOVE ACTION, THE ASSESSEE FILE D APPEAL BEFORE THE CIT(A). THE CIT(A) HELD RELATING TO DISALLOWANCE U/ S 14A, UPHOLD THE DECISION OF THE AO IN INVOKING THE PROVISIONS OF RULE 8D FOR THE PURPOSE OF MAKING DISALLOWANCE UNDER SECTION 14A AND FURTHER HOLD THA T FOR THE PURPOSE OF WORKING OF AVERAGE INVESTMENT, THE A.O SHALL TAKE INTO ACCOUNT ONLY THE 3 ITA NO. 4316/DEL/2014 INVESTMENTS IN HERO MVL ALTERNATE FUEL (P) LTD., HE RO TRANSMISSION (P) LTD. AND M/S SATYAM COMPUTERS (P) LTD. SECONDLY, THE CI T(A) HELD THAT THERE IS MERIT IN THE SUBMISSION OF THE ASSESSEE THAT THE A. O OUGHT TO HAVE TAKEN THE FIGURES OF TOTAL ASSETS OF RS.4,26,45,00,989/- INST EAD OF NET ASSETS OF RS.3,76,08,02,051/-. THE A.O WAS THUS, DIRECTED TO RECOMPUTED THE DISALLOWANCE UNDER RULE 8D BY THE CIT(A). 4. THE LD. DR SUBMITTED THAT THE ASSESSEE COMPANY H AD BEEN INCURRING HEAVY LOSSES FOR THE PAST 7 YEARS AND WAS BORROWING HUGE AMOUNT OF FUNDS FOR THE PURPOSE OF ITS BUSINESS. YET, AT THE SAME TIME , IT HAD GIVEN LOSS ADVANCES TO THE PARTIES MENTIONED HEREINABOVE. THE ASSESSIN G OFFICER RIGHTLY OBSERVED THAT THERE ARE NO BUSINESS PURPOSES OR ADVANTAGE BR OUGHT OUT BY THE ASSESSEE TO JUSTIFY SUCH HUGE ADVANCES WITHOUT IMPRESSION BE ING GIVEN TO RELATED CONCERNS OR WITHOUT ANY COMMERCIAL REASON PARTICULA RLY WITHOUT ITS FINANCIAL CONDITION WAS BAD. THE ASSESSING OFFICER ALSO REL IED ON HONBLE PUNJAB & HARYANA HIGH COURT IN CASE OF CIT VS. ABHISHEK INDU STRIES LTD. 286 ITR 1 WHERE IN IT WAS HELD THAT AS PER THE ISSUE OF ESTAB LISHMENT OF NEXUS OF FUNDS BORROWED VIS--VIS FUNDS DIVERTED TOWARDS SISTER CO NCERN ON INTEREST FREE BASIS IS CONCERNED. IN OUR VIEW, THE STAND OF THE ASSESS EE THAT ONUS OF NEXUS OF FUND AVAILABLE BY THE ASSESSEE WITH FUNDS ADVANCE TO SIS TER CONCERN WITHOUT INTEREST IS ON REVENUE IS NOT CORRECT. THE ASSESSING OFFICE R HAS RIGHTLY RELIED UPON THE JURISDICTIONAL HIGH COURT IN CASE OF ELMER HAVELLS ELECTRICS VS. CIT 277 ITR 549 WHEREIN IT WAS HELD THAT CONCERN WHICH ITSELF W AS RAISING LOSS ADVANCES INTEREST FREE LOANS TO SISTER CONCERN IS NOT JUSTIF IED. THE ASSESSING OFFICER ALSO RELIED UPON THE JUDGMENT OF HONBLE MADRAS HIGH COU RT IN CASE OF K. SUMASUNDRAN & BROS WHEREIN IT IS HELD THAT THE ASSE SSEE TO MAKE LARGE 4 ITA NO. 4316/DEL/2014 BORROWING AND CREATE A LIABILITY FOR PAYMENT OF INT EREST THEREON NOT ONLY FOR THE YEAR IN WHICH BORROWING WAS MADE WITH THE SUBSEQUEN T YEAR AS WELL KEEP LOAN OUTSTANDING AND THEREFORE AFTER DIVERT THE AMOUNT B ORROWED BY TAKING IT OUT OF BUSINESS BY GIVING IT INTEREST FREE TO SISTER CONCE RN. ACCORDINGLY, THE ADVANCE TO ABOVE PARTIES IS HELD TO BE NON BUSINESS PURPOSE . THE ASSESSING OFFICER MADE DISALLOWANCE U/S 14A READ WITH RULE 8D AFTER E XAMINING THAT THE ASSESSEE HAS BORROWED FUNDS WHICH HAVE BEEN UTILIZE D FOR INVESTMENTS. THE ASSESSEE ALSO PAID INTEREST THESE BORROWED FUNDS, T HEREFORE, THE ASSESSEE INCREASE DIRECTED AND INDIRECT IN RESPECT OF INVEST MENTS WHICH WILL RESULT IN EXEMPT INCOME AND HENCE SECTION 14A READ WITH RULE 8D IS EXTRACTED IN THIS CASE. THUS, THE ARGUMENT OF THE ASSESSEE BEFORE TH E ASSESSING OFFICER WAS REJECTED AND EXPENSES ATTRIBUTABLE TO EXEMPT INCOME WAS COMPUTED AS PER RULE 8D OF THE INCOME TAX RULES 1962. THE CIT(A) W AS ERRONEOUS IN ALLOWING THE THIS ISSUE BY HOLDING THAT COMPANY HAD NOT EARN ED ANY DIVIDEND INCOME DURING THE YEAR AND NO NEW INVESTMENTS WERE MADE DU RING THE YEAR. THE SAID INVESTMENTS WERE EXISTING INVESTMENTS AND WAS MADE IN EARLIER YEARS WITH THE ASSESSEE HAD TRANSFERRED ITS UNDERTAKINGS ON A SLUM P SALE BASIS. 5. THE LD. AR RELIED UPON THE ORDER OF THE CIT(A). 6. WE HAVE HEARD BOTH THE PARTIES IT IS PERTINENT T O NOTE THAT THE CIT(A) HAS OBSERVED THAT THE COMPANY HAD NOT EARNED ANY DIVIDE ND INCOME DURING THE YEAR AS WELL AS NO NEW INVESTMENT WAS MADE DURING T HE YEAR. THE INVESTMENTS WHICH WERE DOUBTED BY THE ASSESSING OFFICER WERE M ADE IN EARLIER YEARS WHEN THE ASSESSEE HAD TRANSFERRED ITS UNDERTAKINGS ON SL UMP SALE BASIS UNDER 5 ITA NO. 4316/DEL/2014 WHICH EQUITY SHARES AS PER THE APPROVED SCHEME OF D IFFERENT MERGER WERE ALLOTTED TO IT. FROM THE RECORDS IT CAN BE SEEN T HAT THE INVESTMENT WAS MADE PRIOR TO THIS ASSESSMENT YEAR. THEREFORE, IT CANNO T BE DOUBTED THAT THE INVESTMENT WAS NOT A GENUINE INVESTMENT. THERE IS NO NEXUS BETWEEN THE INTEREST PAID BY THE ASSESSEE AND INVESTMENT MADE I N THESE COMPANIES THERE WAS NO SUFFICIENT EVIDENCE BROUGHT ON RECORD BY THE ASSESSING OFFICER AS WELL WHILE INVESTING THE DIVIDEND INCOME AND INTEREST TH EM MERELY DOUBTING THE INVESTING BECAUSE IT IS INTEREST FREE LOAN CANNOT B E UNDER THE PROVISIONS OF SECTION 14A READ WITH RULE 8D. OUT OF THE EXISTING INVESTMENTS, INVESTMENTS IN M/S MUNJAL KIRIU INDUSTRIES (P) LTD., M/S HERO C HASSIS SYSTEM (P) LTD. AND M/S HERO GLOBAL DESIGN LTD. WERE MADE IN EARLIER YE ARS WHEN THE ASSESSEE HAD TRANSFERRED ITS UNDERTAKINGS ON SLUMP SALE BASI S., UNDER WHICH EQUITY SHARES AS PER THE APPROVED SCHEME OF DE-MERGER WERE ALLOTTED TO IT. THE ASSESSEE HAD MADE INVESTMENTS IN EQUITY SHARES OF M /S SATYAM COMPUTERS LTD., WHICH HAVE BEEN VALUED AT RS.73,26,582, AS ON 31.03.2010 AND ALSO HAD MADE INVESTMENTS IN HERO MVL ALTERNATE FUEL (P) LTD ., A SISTER CONCERN IN THE F.Y.2008-09. THESE INVESTMENTS HELD FOR YIELDING TA X EXEMPT DIVIDEND INCOME. THE ASSESSE HAS NOT DISALLOWED THE EXPENSES INCURRE D FOR EARNING EXEMPT INCOME OUT OF SUCH INVESTMENTS AND THERE IS NO EVID ENCE THAT WORKING CAPITAL LOAN MAY NOT HAVE BEEN DEPLOYED FOR MAKING SUCH INV ESTMENT, THEREFORE, THE LACK OF SATISFACTION OF THE AO WITH THE CLAIM OF TH E ASSESSEE THAT NO EXPENSES WERE INCURRED FOR EARNING DIVIDEND INCOME FROM SUCH INVESTMENTS. THE AO WHILE DISALLOWING THIS HAS NOT BROUGHT ON RECORD AN YTHING TO ESTABLISH THAT THE ASSESSEE HAD INCURRED ANY EXPENSES WHILE EARNING TH IS EXEMPT INCOME AND HE HAS NOT GIVEN ANY FINDING IN THIS RESPECT. THEREFO RE, THE ACTION OF THE AO IN 6 ITA NO. 4316/DEL/2014 DISALLOWING THE DIVIDEND INCOME U/S 14A READ WITH R ULE 8D IS NOT JUST AND PROPER. 7. IN CASE OF CIT-II VS. HERO CYCLES LTD. (ITA NO. 331/2009 (O&M): DECIDED ON 04.11.2009) THE PUNJAB AND HARYANA HIGH COURT HE LD THAT DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING EXP ENDITURE WHERE IT IS FOUND THAT FOR EARNING EXEMPT INCOME NO EXPENDITURE HAS B EEN INCURRED, DISALLOWANCE UNDER SECTION 14A CANNOT STAND. IN TH IS CASE AO HAS NOT GIVEN SUCH FINDING ABOUT INCURRING THE EXPENDITURE ON EAR NING THE DIVIDEND INCOME AS WELL AS TO THE EXTENT OF THE INVESTMENT MADE BY THE ASSESSEE. IN CASE OF MAXOPP INVESTMENT LTD. V. COMMISSIONER OF INCOME-TA X, NEW DELHI [2011] 15 TAXMANN.COM 390 (DELHI HC) IT WAS HELD THAT WHILE R EJECTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPEN DITURE IN RELATION TO EXEMPT INCOME, THE AO MUST SPECIFY COGENT REASONS FOR THE SAME AND HAS TO SHOW WHY HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASS ESSEES CLAIM. IN THE PRESENT CASE AO FAILED TO SPECIFY ANY COGENT REASONS WITH R EGARD TO EXPENDITURE. IN CASE OF CIT VS. WALFORT SHARE AND STOCK BROKERS (P) LTD . 326 ITR 1 (SC) IT WAS HELD THAT FOR ATTRACTING SECTION 14A, THERE HAS TO BE P ROXIMATE CAUSE FOR DISALLOWANCE, WHICH IS ITS RELATIONSHIP WITH THE TA X EXEMPT INCOME. 8. IN LIGHT OF THE RATIO LAID DOWN IN THE ABOVEMENT IONED JUDGMENT OF THE SUPREME COURT AND HIGH COURT, THE FINDING GIVEN BY THE CIT(A) IS UPHELD HEREWITH. 9. IN RESULT, THE APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH MAY, 2017 . SD/- SD/- (N. K. SAINI) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER 7 ITA NO. 4316/DEL/2014 DATED: 15/05/2017 R. NAHEED * COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 03/05/2017 PS 2. DRAFT PLACED BEFORE AUTHOR 03/05/2017 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2017 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 15.05.2017 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 15.05.2017 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE 8 ITA NO. 4316/DEL/2014 HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.