The Dy. Commissioner of Income Tax 1(1), Indore V. M/s M.P.Financial Corporation, Indore

ITA 460/IND/2010

• Counselvise Citation: 46022714 RSA 2010
• Duration Of Justice: 1 year(s) 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 23-08-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 09-07-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KESHAVE SAXENA
• Assessee Lawyers: H P VERMA
• Keywords: Earning of tax free income
• Section: 143(3); 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH, INDORE BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI R.C. SHARMA, ACCOUNTANT MEMBER ITA NO.430/IND/2010 A.Y. 2007-08 M/S. MADHYA PRADESH FINANCIAL CORPORATION INDORE PAN AADCM 6480 C ... APPELLANT VS DCIT-1(1), INDORE ... RESPONDENT ITA NO.460/IND/2010 A.Y. 2007-08 DCIT-1(1), INDORE ... APPELLANT VS M/S. MADHYA PRADESH FINANCIAL CORPORATION INDORE PAN AADCM 6480 C ... RESPONDENT ASSESSEE BY : SHRI H.P. VERMA & SHRI ASHISH GOYAL DEPARTMENT BY : SHRI KESHAVE SAXENA DATE OF HEARING : 2.11.2011 DATE OF PRONOUNCEMENT : 4.11.2011 O R D E R PER JOGINDER SINGH THESE CROSS-APPEALS ARE BY THE ASSESSEE AS WELL AS BY THE REVENUE CHALLENGING THE ORDER DATED 18.3.2010 O F THE 2 LEARNED COMMISSIONER OF INCOME TAX(A)-I, INDORE. IN THE APPEAL OF THE ASSESSEE, THE ONLY GROUND RAISED IS T HAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. FIRST APPELLATE AUTHORITY ERRED IN CONFIRMING THE DISALLOWANCE U/S 14A FOR INTEREST EXPENSES (WHICH IS WORKED OUT TO BE AT RS. 12,32,967/-) IN RESPECT OF INVESTMENT IN SHARES OF RS.2.22 CRORE S OUT OF AGGREGATE INVESTMENT IN SHARES OF RS.187.22 CRORES. ON THE OTHER HAND, THE REVENUE IS AGGRIEVED BY THE IMPUGNE D ORDER WHEREIN THE DISALLOWANCE MADE U/S 14A READ WITH RUL E 8D ON ACCOUNT OF INVESTMENT OF RS.1,87,22,05,690/- IN SHA RES OF M.P. POWER GENERATING COMPANY. 2. DURING HEARING OF THIS APPEAL, WE HAVE HEARD SHR I H.P. VERMA ALONG WITH SHRI ASHISH GOYAL, LEARNED COUNSEL FOR THE ASSESSEE AND SHRI KESHAVE SAXENA, LEARNED CIT/DR. THE CRUX OF ARGUMENTS ON BEHALF OF THE REVENUE (ITA NO.460/IND/2010) IS THAT THE ASSESSING OFFICER IS J USTIFIED IN MAKING THE DISALLOWANCE U/S 14A TOWARDS THE INTERES T EXPENSES. ON THE OTHER HAND, THE LEARNED COUNSEL FO R THE ASSESSEE DEFENDED THE IMPUGNED ORDER. 3 3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL AVAILABLE ON FILE. THE FACTS, IN BRIEF , ARE THAT THE ASSESSEE IS A STATE FINANCIAL CORPORATION CREATED U NDER THE ACT OF 1951. THE MAIN SHAREHOLDINGS ARE HELD BY THE GOV T. OF M.P. AND SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (IN SHORT SIDBI). MPFC GRANTED LOAN FOR INDUSTRIAL DEVELOPMEN T AND IN SOME CASES, IN ORDER TO INSURE PROPER UTILISATION O F LOANS, MPFC ALSO TOOK EQUITY PARTICIPATION. THE STATE GOVT. WAN TED TO INVEST IN M.P. POWER GENERATING LTD., THEREFORE, IT INVEST ED 189 CRORES IN SHARE CAPITAL OF MPFC, WHICH IN TURN, INVESTED I N M.P. POWER GENERATING COMPANY. THE AMOUNT OF 185 CRORES WAS DI SBURSED BY THE STAGE GOVT. ON 16.1.2007 (RS.40 CRORES) (PAP ER BOOK PAGE 50), RS.135 CRORES (PAPER BOOK PAGE 51) ON 12. 3.2007 AND REMAINING RS.10 CRORES (PAPER BOOK PAGE 52) IN MARCH, 2007. THE CRUX OF ARGUMENTS ON BEHALF OF THE ASSESS EE IS THAT THERE IS DIRECT NEXUS OF INTEREST FREE FUNDS (SHARE CAPITALS) AND INVESTMENT OF SAME IN M.P. POWER GENERATING LTD., T HEREFORE, THE INTEREST EXPENDITURE INCURRED IN RELATION TO EX EMPTED INCOME, NO DISALLOWANCE U/S 14A IS REQUIRED FOR WHI CH RELIANCE 4 WAS PLACED IN CIT VS. SUSHMA KAPOOR (188 TAXMAN 24) (DEL), VOLTAS LTD. (125 TTJ 601) (MUM) AND CIT VS. HERO CY CLES (189 TAXMAN 50) (P & H). IT WAS FURTHER CLARIFIED THAT T HE INVESTMENT IN M.P. POWER GENERATING LTD. WAS MADE BY MPFC AS P ER THE DIRECTIONS OF THE STATE GOVT. FURTHER, IT WAS CLARI FIED THAT NO DIVIDEND INCOME (EXEMPT INCOME) WAS EARNED, THEREFO RE, NO DISALLOWANCE U/S 14A IS CALLED FOR, FOR WHICH, RELI ANCE WAS PLACED UPON IN THE CASE OF CIT VS. VINSON TEXTILES (319 ITR 204) (P & H). 3.1 IF THE ASSERTION MADE BY THE LD. RESPECTIVE COU NSEL AND THE FACTS AVAILABLE ON RECORD ARE ANALYSED, WE FIND THA T THE MAIN SHAREHOLDERS ARE THE STATE GOVT. OF M.P. AND SIDBI. ON EXAMINATION OF BALANCE-SHEET, IT WAS NOTED BY THE L D. ASSESSING OFFICER THAT THERE IS INVESTMENT OF RS.1,87,22,05,6 90/- IN SHARES. THE ASSESSING OFFICER DISALLOWED PROPORTION ATE INTEREST CLAIMED U/S 14A OF THE ACT. DURING ASSESSMENT PROCE EDINGS, THE STAND OF THE ASSESSEE WAS THAT THE INVESTMENT O F RS.185 CRORES WAS MADE BY THE STATE GOVT. IN M.P. POWER GE NERATING COMPANY AND AS SUCH, THERE IS DIRECT NEXUS BETWEEN SHARE 5 CAPITAL AND SUCH INVESTMENT AND FURTHER NO PORTION OF INTEREST PAYMENT RELATE TO THE INVESTMENT OF RS.185 CRORES A ND THE REMAINING INVESTMENT OF RS.2.20 CRORES IN THE SHARE CAPITAL IS BY THE DIFFERENT SIXTEEN COMPANIES MADE DURING LAST DIFFERENT YEARS. THE WHOLE CRUX OF ARGUMENTS IS THAT NO DISAL LOWANCE OUT OF INTEREST, SO CLAIMED, IS CALLED FOR U/S 14A. HOW EVER, THE LD. ASSESSING OFFICER DID NOT AGREE WITH THE SUBMISSION OF THE ASSESSEE ON THE PLEA THAT SIDBI CANNOT OVERRIDE THE STATUTORY PROVISIONS FOR SECTION 14A, CONSEQUENTLY, HE DISALL OWED RS.5,25,93,437/-, OUT OF INTEREST CLAIMED BY THE AS SESSEE. THE BASIS REQUIREMENT FOR INVOKING SECTION 14A OF THE A CT IS THAT THE ASSESSEE SHOULD HAVE INCURRED EXPENSES IN EARNING T HE TAX FREE INCOME, MEANING THEREBY, IF NO EXPENDITURE IS INCURRED TO EARN EXEMPTED INCOME THEN THE PROVISIONS OF 14A IS NOT TO BE INVOKED. THE ASSESSEE WAS HAVING INVESTMENT IN SHAR E CAPITAL OF DIFFERENT COMPANIES TO THE TUNE OF RS.187.22 CRO RES AS ON 31.3.2007 AND INVESTMENT OF RS.185 CRORES WAS MADE IN SHARE CAPITAL OF ANOTHER PUBLIC SECTOR UNDERTAKING I.E. M .P. POWER GENERATING COMPANY LTD., OF STATE GOVT. AND SUCH IN VESTMENT 6 WAS MADE ON THE SPECIFIC INSTRUCTIONS/DIRECTIONS OF THE STATE GOVT. THE STATE GOVT. CONTRIBUTED THE AMOUNT OF RS. 185 CRORES BY WAY OF CONTRIBUTION SHARE CAPITAL OF THE ASSESSE E UNDERTAKING, THEREFORE, THERE IS A DIRECT NEXUS BET WEEN THE INVESTMENT, SO MADE, OUT OF SHARE CAPITAL CONTRIBUT ED BY THE STATE GOVT., CONSEQUENTLY, PROVISIONS OF SECTION. 1 4A ARE NOT APPLICABLE WITH REFERENCE TO THE INVESTMENT MADE IN SHARE CAPITAL. THE RATIO LAID DOWN IN WINSOME TEXTILES (3 19 ITR 204) (P & H), CIT VS. HERO CYCLES (189 TAXMAN 50) (P & H ) AND VOLTAS LTD. (125 TTJ 601) (MUM) SUPPORTS OUR VIEW A S IT WAS FROM SHARE CAPITAL, THEREFORE, WE FIND NO INFIRMITY ON THIS PART OF THE CONCLUSION DRAWN BY THE LD. CIT(A). THE SAME I S AFFIRMED. 4. THE ASSESSEE IN ITS CROSS-APPEAL (ITA NO.430/IND /2010) IS AGGRIEVED BY THE DIRECTION OF THE LD. CIT(A) FOR TH E REMAINING INVESTMENT OF RS.2.22 CRORES ON THE PLEA THAT THE A SSESSEE DID NOT FURNISH THE RELEVANT DOCUMENTS TO ESTABLISH ITS CLAIM TO THE EFFECT THAT THE SAME WAS ALSO MADE OUT OF ITS SHARE CAPITAL AND APPLICATION OF SECTION 14A WITH REFERENCE TO THIS I NVESTMENT AND RESTRICTION OF INVESTMENT MADE IN SHARE CAPITAL. TH E CRUX OF 7 ARGUMENTS ON BEHALF OF THE ASSESSEE IS THAT THE NEC ESSARY DOCUMENTS WERE DULY FURNISHED BY THE ASSESSEE WHERE AS THE LD. CIT/DR DEFENDED THE IMPUGNED ORDER. IF THE TOTA LITY OF FACTS AVAILABLE ON RECORD AND THE ASSERTION MADE BY THE L D. RESPECTIVE COUNSEL ARE ANALYSED, WE FIND THAT THE D ETAILS OF INVESTMENT ARE AVAILABLE AT PAGE 32 OF THE PAPER BO OK WHEREIN 185 CRORES WAS AVAILABLE AS ON 31.3.2007 WITH THE A SSESSEE AND THE REMAINING AMOUNT OF RS.2,07,79,590/- WAS FR OM OTHER COMPANIES. AS ON 31.3.2006, THE AMOUNT OF RS.2,18,73,79,736/- WAS FROM SIDBI AND RS.36,82,338 /- WAS FROM N.D.I. (SIDBI) (PAPER BOOK PAGE 28). NOW, QUES TION ARISES WHETHER 185 CRORES WAS BORROWED AMOUNT OR SHARE CAP ITAL. WHILE DECIDING THE APPEAL OF THE REVENUE (SUPRA), W E HAVE ALREADY HELD THE AMOUNT OF RS.185 CRORES WAS FROM T HE STATE GOVT., INVESTED IN THE ASSESSEE CORPORATION BY THE GOVT. NOTIFICATION AVAILABLE AT PAGE 47 OF THE PAPER BOOK AND WAS DISBURSED BY THE GOVT. ON VARIOUS DATES (AS DISCUSS ED IN PRECEDENT PARA OF THIS ORDER). WE FIND THAT IN EARL IER YEARS, THE ASSESSMENT WAS FRAMED U/S 143(3) OF THE ACT AND NO 8 DISALLOWANCE WAS MADE U/S 14A OF THE ACT (PAPER BOO K PAGES 54-62 AND 63,64). IN THE CURRENT FY NOTHING HAS BEE N BROUGHT ON RECORD BY THE DEPARTMENT TO PROVE THAT THE LOAN AMOUNT WAS INVESTED IN SHARES OF THESE COMPANIES RATHER SUFFIC IENT INTEREST FREE FUNDS WERE AVAILABLE WITH THE ASSESSEE (PAPER BOOK PAGE 21), THEREFORE, UNDER THESE FACTS, THE BURDEN IS ON THE REVENUE TO PROVE THAT INTEREST BEARING FUNDS WERE INVESTED IN SHARES WHICH HAS NOT BEEN DISCHARGED BY THE DEPARTMENT. MP FC IS ENGAGED IN PROVIDING LONG TERM FINANCE AND INVESTME NT IN SHARES OF THESE COMPANIES WAS MADE TO MAKE SURE EQU ITY PARTICIPATION TO HAVE CONTROL OVER UTILISATION OF F UNDS/LOANS AND ALSO TO ENSURE HIGHER RETURNS, IN CASE OF PROFIT. T HUS, THE INVESTMENT IN SHARES WAS FOR BUSINESS OPERATION/COM MERCIAL EXPEDIENCY, THEREFORE, THIS APPEAL OF THE ASSESSEE ALSO DESERVES TO BE ALLOWED AS THE NECESSARY DOCUMENTS A RE VERY MUCH AVAILABLE BEFORE THE REVENUE AUTHORITIES. FINALLY, THE APPEAL OF THE REVENUE IS DISMISSED WH EREAS THE APPEAL OF THE ASSESSEE IS ALLOWED. 9 ORDER PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF LD. REPRESENTATIVES OF BOTH SIDES AT THE CONCLUSION OF THE HEARING. SD SD (R.C.SHARMA) (JOGINDER SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 4.11.2011 COPY TO: APPELLANT, RESPONDENT, CIT, CIT(A), DR, GU ARD FILE !VYAS!