DCIT, CHENNAI V. Trivitron Health Care Pvt. Ltd., CHENNAI

ITA 462/CHNY/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5797 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 19-06-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 02-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset; Business expenditure; Earning of tax free income; Proportionate interest; Wholly owned subsidiary
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: CHENNAI . . . , , $ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER ./ ITA NO.462/MDS/2016 % % /ASSESSMENT YEAR: 2012-13 THE DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(1), CHENNAI. VS. M/S. TRIVITRON HEALTH CARE PVT. LTD., SAPTAGIRI BHAWAN NEW NO.15, OLD NO.25, 4 TH STEET, ABHIRAMPURAM (NEAR CITI BANK), CHENNAI-600 018. [PAN: AAACT 9378 H] ( ( /APPELLANT) ( )*( /RESPONDENT) (+ / APPELLANT BY : MR. V.SREENIVASAN, JCIT )*(+ / RESPONDENT BY : MR. S.SRIDHAR, ADV. + /DATE OF HEARING : 28.08.2017 + /DATE OF PRONOUNCEMENT : 20.11.2017 / O R D E R PER S. JAYARAMAN , ACCOUNTANT MEMBER : THE REVENUE FILED THIS APPEAL AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-18, CHENNAI, IN ITA NO.61/14-1 5 DATED 28.12.2015 FOR THE AY 2012-13. ITA NO.462/MDS/2016 :- 2 -: 2. M/S. TRIVITRON HEALTH CARE PVT. LTD., THE ASSES SEE, IS IN THE BUSINESS OF SELLING / DISTRIBUTING IMAGING EQUIPMENTS AND M ACHINERIES SUCH AS CT, MR, X-RAY MACHINES , ULTRA SOUND MACHINES ETC. IN THE ASSESSMENT MADE FOR THE A Y 2012-13, THE AO NOTICED THAT THE ASSESSEES INVESTMENTS IN THE SHARES OF OTHER COMPANIES INCREASED FROM RS.21.60 CRS. TO RS.48.08 CRS. HENCE, INVOKING THE PROVISIONS OF SEC.14A R.W.R.8D, THE AO DISALLOWED RS.10,92,205/-. FURTHER, THE AO FOUND THAT THE MAIN REASON FOR THE INCREASE IN THE INVESTMENTS WAS TO ACQUIRE THE BUSINESS OF M/S. KI RAN MEDICAL SYSTEMS LTD. (M/S. KMSL) FOR RS.26.00 CR. DURING THE YEAR, T HE ASSESSEE HAS ACQUIRED ONLY 26% OF SHARES AND ULTIMATELY 100% SHARES WA S ACQUIRED IN THE SUBSEQUENT FINANCIAL YEARS. THE AO HELD THAT UNTI L THE CONTROL OF THE BUSINESS OF M/S. KMSL IS ACQUIRED UP TO THE LEVEL OF AT L EAST 51% OF ITS SHARES, IT IS ONLY A PART PAYMENT AND THE CAPITAL ASSET HAS NOT BEEN PUT TO USE. THEREFORE, HE DISALLOWED PROPORTIONATE INTEREST ON THE INVESTMENT OF RS.26.00 CR. @ 11% AT RS.2,14,50,000/- U/S.36(1)(III) AND HE LD THAT THE INTEREST TO THIS EXTENT SHOULD HAVE BEEN CAPITALIZED. AGGRIEV ED, THE ASSESSEE FILED AN APPEAL BEFORE THE CIT (A). THE CIT (A) ALLOWED THE ASSESSEES APPEAL. AGGRIEVED AGAINST THE CIT (A) ORDER, THE REVENUE FI LED THIS APPEAL PRIMARILY ON TWO GROUNDS VIZ., 1) THE LEARNED CIT (A) ERRED IN NOT APPRECIAT ING THAT THE PROVISIONS OF SECTION 14A IS MANDATORY, THE METHOD OF COMPUTATIO N PROVIDED IN RULE 8D OF THE IT RULES 1962 HAS 3 LIMITS, VIS., A) DIRECT INT EREST EXPENSES, B) INDIRECT EXPENSES AND C) EXPENDITURE AND IN THIS CASE, TH E ASSESSING OFFICER HAS COMPUTED DISALLOWANCE UNDER THE THIRD LIMB I.E., EX PENDITURE INCURRED. SUCH ITA NO.462/MDS/2016 :- 3 -: DISALLOWANCES HAVE TO BE MADE EVEN IF THERE IS NO EXEMPT INCOME NOR ANY EXPENDITURE INCURRED RELATING TO THESE INVESTMEN T. 2. THE CIT (A) ERRED IN NOT APPRECIATING THE FACT T HAT THE PAYMENT OF RS.26.00 CR. MADE TOWARDS ACQUISITION OF SHARES IN M/S.KMSL IS FROM OVERDRAFT ACCOUNT MAINTAINED IN ICICI BANK, THE ASSESSE WAS PAYING I NTEREST @ 12% TOWARDS SUCH OVERDRAFT BANK ACCOUNT AND HENCE SUCH INTEREST WAS NOT UTILIZED FOR THE PURPOSE OF BUSINESS BUT FOR ACQUIRING THE BUSINESS OF THE COMPANY M/S.KMSL WHICH IS A CAPITAL ASSET . UNTIL THE CONTROL OF THE BUSINESS OF M/S.KMSL IS TAKEN OVER TO THE LEVEL OF AT LEAST 51%, THE PURCHASE OF 26% OF SHARES DURING THE ASSESSMENT YEAR 2012-13 IS TO BE CONSTRUED ONLY AS A PART PAYMENT AND HENCE THE CAPITAL HAS NOT BEEN PUT TO USE. HENCE, PROPORT IONATE INTEREST ON THE INVESTMENT OF RS.26.00 CR. SHOULD HAVE BEEN DISALLO WED U/S.36 (1)(III). 3. THE DR SUBMITTED THAT IT IS CLEAR FROM THE AS SESSMENT ORDER THAT THE AO RELYING ON THE CIRCULAR NO. 5/2014 WHICH PROVIDE S THAT IRRESPECTIVE OF THE FACT WHETHER ANY EXEMPT INCOME HAS BEEN EARNED DURI NG THE FINANCIAL YEAR OR NOT, DISALLOWANCE U/S.14A SHOULD BE MADE IF INVESTM ENT IS MEANT FOR EARNING OF EXEMPTED INCOME. THEREFORE, AO COMPUTED THE DISA LLOWANCE AT RS. 10,92,205/- . THEREAFTER, HE SUBMITTED THAT TWO FIXED DEPOSITS MADE OUT OF LOAN SANCTIONED BY STANDARD AND CHARTERED BANK AND ONE TRANSFER FROM OVERDRAFT ACCOUNT WHERE USED FOR PAYMENT OF RS.26.0 0 CR. TOWARDS ACQUISITION OF SHARES IN M/S. KMSL. THE AO NOTICED THAT ONE DAY BEFORE THE MONEY HAS BEEN TRANSFERRED TO ICICI BANK, THE ASSESSEES A/ C HAS BEEN CREDITED BY THE BANK WITH A SHORT TERM LOAN OF 6 CRORES ON 04/08/20 11. THUS, IT IS CLEAR THAT THE ASSESSEE IS USING INTEREST BEARING FUND TO ACQU IRE THE SHARES OF THE COMPANY M/S. KIRAN MEDICAL SYSTEM LIMITED. IT ACQUI RED THE SHAREHOLDING AS ON 05.08.2011 AT 26% , AS ON 01.11.2012 AT 51% AND AS ON 10.12.2013 ITA NO.462/MDS/2016 :- 4 -: 100%. THE MAIN PURPOSE WAS NOT TO EARN DIVIDEND INC OME, BUT WAS TO ACQUIRE THE ENTIRE BUSINESS OF KMSL. THE MINUTES O F THE MEETING HELD ON 19.02.2013 SHOWS THAT THE COMPANY PLANNED TO ACQUI RE THE BUSINESS OF OTHER COMPANIES INDULGED IN IMAGING/MEDICAL BUSINESS ALSO . THEREFORE, THE INTENTION AND PURPOSE WAS TO ACQUIRE THE BUSINESS O F M/S. KMSL , NOT ITS SHARES AS AN INVESTMENT, WHICH IS A CAPITAL ASSET . UNTIL THE CONTROL OF THE BUSINESS OF M/S. KMSL IS TAKEN OVER TO THE LEVEL OF AT LEAST 51%, THE PURCHASE OF 26% OF SHARES DURING THE ASSESSMENT YEAR 2012-13 HAS TO BE CONSTRUED AS A PART PAYMENT ONLY AND HENCE THE CAPITAL HAS NOT B EEN PUT TO USE. IN VIEW OF THAT PROPORTIONATE INTEREST ON THE IMPUGNED INVESTM ENT SHOULD HAVE BEEN DISALLOWED U/S.36 (1)(III). THE DR SUBMITTED THAT THE CIT (A) HAS NOT PROPERLY APPRECIATED THE FACTS AND THE PROVISIONS OF SECTION 36(1)(III) AND HENCE PLEADED THAT THE ORDER OF THE CIT(A) MAY BE SET ASI DE AND THE ORDER OF THE AO BE RESTORED. 4. PER CONTRA, THE AR INVITING OUR ATTENTION TO THE RELEVANT PORTION OF THE ASSESSMENT ORDER AND THE ORDER OF THE CIT (A) SUBMI TTED THAT THE A O HAS DISALLOWED RS 10,92,205/- UNDER SECTION 14A READ WI TH RULE 8D ON ACCOUNT OF THE INVESTMENTS MADE BY THE ASSESSEE IN FEW OF IT S SUBSIDIARIES / ASSOCIATES WHICH ARE STRATEGIC IN NATURE. SUCH INVESTMENTS WER E MADE IN THE COURSE OF THE BUSINESS , OUT OF OWN FUNDS AND RETAINED EARNIN GS AND NO INTEREST BEARING FUNDS HAVE BEEN USED FOR ACQUIRING THEM. THERE HAS BEEN NO CLAIM OF ITA NO.462/MDS/2016 :- 5 -: EXEMPTED INCOME AND NO EXPENDITURE HAS BEEN INCURRE D RELATED TO THESE INVESTMENTS. IN THE CIRCUMSTANCES, IT IS SUBMITTED THAT SECTION 14 A AND RULE 8D HAVE NO APPLICATION AND HENCE THERE CANNOT BE AN Y DISALLOWANCE UNDER THIS PROVISION. THE AR RELIED ON THE CHENNAI TRIBUNAL DE CISIONS : IN CIT VS M. BHASKARAN ITA NO: 171 7/MDS/2013 DA TED 31ST JULY 2014 WHEREIN IT WAS HELD THAT THERE CANNOT BE ANY DIS ALLOWANCE UNDER SECTION 14A, IF THE ASSESSEE HAS NOT EARNED/ RECEIVED ANY EXEMPT ED INCOME AND IN EIH ASSOCIATED HOTELS LTD. V. DCIT IT WAS HEL D THAT INVESTMENTS MADE BY THE ASSESSEE IN THE SUBSIDIARY COMPANY WERE NOT ON INVESTMENT FOR EARNING CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAD BEEN MADE BY THE ASSESSEE TO PROMOTE SUBSIDIARY COMPANY INTO HOTEL I NDUSTRY AND WERE ON ACCOUNT OF BUSINESS EXPENDITURE AND DIVIDEND THERE FROM IS PURELY INCIDENTAL. THEREFORE, THE INVESTMENT MADE BY THE ASSESSEE IN I TS SUBSIDIARY IS NOT TO BE RECKONED FOR DISALLOWANCE U/S.14A R.W.R.8D AND SEVERAL HIGH COURT DECISIONS IN THE LAST ONE Y EAR IN SUPPORT OF THE ABOVE RATIO VIZ A) CIT VS SIVAM MOTORS PVT LTD - ITA NO: 88 OF 2014 DATED 05/05/14 ALLAHABAD HIGH COURT. B) CIT VS CORRTECH ENERGY PVT LTD ITA NO: 239 OF 2014 DATED 24/03/2014- GUJARAT HIGH COURT. C) CIT VS DELITE ENTERPRISES (ITA NO: 2009 OF 2014 BOMBAY HIGH COURT D) CIT VS WNSOME TEXTILE INDUSTRIES LTD (319 ITR 20 4) - PUNJAB & HARYANA. E) IN ITO V. PIONEER RADIO TRAINING SERVICES PVT. L TD. (ITA NO. 4448/DEL/2013) (ORDER DATED 19-1-2015), THE DELHI I TAT HAS HELD THAT INVESTMENTS IN SUBSIDIARIES ARE NOT TO EARN DIVIDEN D INCOME AND CANNOT BE CONSIDERED FOR DISALLOWANCE ETC. WITHOUT PREJUD ICE TO THE CLAIM THAT THERE CAN BE NO DISALLOWANCE UNDER SECTION 14A IN THE ABSENCE OF CLAIM OF EXEMPTED INCOME, THE AR INVITED OUR ATTENT ION TO THE ALTERNATE GROUNDS RAISED BEFORE THE CIT(A) AS UNDER : ITA NO.462/MDS/2016 :- 6 -: THE FOLLOWING COMPANIES HAVE MERGED WITH TRINITRON HEALTHCARE PRIVATE LTD, THE ASSESSEE, VIDE COURT OR DER DATED 15 -03-2015, THE APPOINTED DATE BEING 1ST APRIL 201 1. A) TRIVITRON MEDICAL TECHNOLOGIES PRIVATE B) TRIVITRON DENTAL TECHNOLOGIES PRIVATE LTD C) ET TRIVITRON MEDICAL SOLUTIONS PRIVATE LTD ONE OF THE MAJOR DIVISIONS OF TRIVITRON MEDICAL S YSTEMS PRIVATE LTD HAS BEEN DEMERGED AND MERGED WITH TRIVITRON HEALTHC ARE PRIVATE LTD. THE APPOINTED DATE FOR THIS DEMERGER IS ALSO F IXED AS 1ST APRIL 2011. WHILE CALCULATING THE DISALLOWANCE, THE INVES TMENTS IN THESE SUBSIDIARIES HAVE ALSO BEEN CONSIDERED. AS THESE CO MPANIES HAVE MERGED EFFECTIVE FROM 1ST APRIL 2011, THE INVESTMEN TS IN THESE COMPANIES SHOULD HAVE BEEN EXCLUDED WHILE CALCULATI NG 14A DISALLOWANCE. FURTHER, WHILE CALCULATING THE DISALL OWANCE, INVESTMENTS IN COMPANIES OUTSIDE INDIA HAVE ALSO BE EN CONSIDERED. THE FOLLOWING COMPANIES ARE LOCATED OUTSIDE INDIA A ND ANY DIVIDEND INCOME FROM THESE COMPANIES IS TAXABLE IN INDIA; A) STAR TRIVITRON FZLLC, DUBAI B) TRIVITRON NAVAKRAMA MEDICAL TECHNOLOGIES PRIVATE LTD , SRILANKA. AND SUBMITTED THAT FOR THE PURPOSE OF CALCULATING T HE AVERAGE INVESTMENTS, THE INVESTMENTS IN THE FOREIGN SUBSIDIARIES / ASSOCIATE S HAVE TO BE EXCLUDED. 4.1 WITH REGARD TO THE DISALLOWANCE MADE UNDER SECT ION 36 (1) (III) , THE AR INVITING OUR ATTENTION TO THE RELEVANT PORTION OF T HE ASSESSMENT ORDER AND THE ORDER OF THE CIT (A) SUBMITTED THAT THE INVESTMENTS IN KIRAN MEDICAL SYSTEMS LTD AND ALLIANCE MEDICORP LTD WERE MADE FOR STRATE GIC REASONS DURING THE YEAR 2011-12. ALL THE INVESTMENTS WERE MADE OUT OF OWN FUNDS AND NOT OUT OF BORROWED FUNDS AS EVIDENCED BY THE TABLE BELOW; ITA NO.462/MDS/2016 :- 7 -: (RS. IN LAKHS) PAID UP CAPITAL 81.03 RES ERVES AND SURPLUS 5868.89 TOTAL NET WORTH 5949.92 THE APPLICATION OF FUNDS AS ON 31.03.2012 WAS AS FO LLOWS: TANGIBLE FIXED ASSETS 1081.21 INTANGIBLE FIXED ASSETS 65.89 NON - CURRENT INVESTMENTS (INCLUDING INVESTMENTS IN KIRAN MEDICAL AND ALLIANCE MEDICORP 4807.98 TOTAL 5955.08 THE ABOVE TABLE WOULD PROVE THAT THE INVESTMENT S IN FIXED ASSETS AS WELL AS INVESTMENTS HAVE BEEN MADE OUT OF SHARE CAPITAL AND ACCUMULATED EARNINGS AND NOT OUT OF BORROWED FUNDS. THE AO FAIL ED TO APPRECIATE THE FACT THAT THE INVESTMENTS MADE IN KIRAN MEDICAL SYST EMS PRIVATE LTD WAS STRATEGIC IN NATURE. BOTH THE ASSESSEE AND KIRAN MEDICAL SYSTEMS PRIVATE LTD ARE ENGAGED IN SAME HEALTHCARE BUSINESS WHILE THE A PPELLANT IS SELLING / DISTRIBUTING IMAGING EQUIPMENTS AND MACHINERIES SU CH AS CT, MR, X-RAY MACHINES , ULTRA SOUND MACHINES ETC., KIRAN MEDICA L SYSTEMS PRIVATE LTD IS ENGAGED IN MANUFACTURE AND DISTRIBUTION OF CONSUMAB LES USED IN IMAGING BUSINESS, SUCH AS DIGITAL X RAY CASSETTES, CONTRAST MEDIA, X-RAY PROTECTION APPARELS ETC.. BOTH BUSINESSES HAVE GREAT SYNERGY A ND THE ACQUISITION OF KIRAN MEDICAL SYSTEMS PRIVATE LTD WILL GREATLY ENHANCE TH E BUSINESS DYNAMICS OF THE APPELLANT AND GIVE THEM A CLEAR EDGE IN TERMS OF PR ODUCT RANGE, EXPORT OPPORTUNITIES, GEOGRAPHICAL SPREAD ETC. THE AO ALSO FAILED TO APPRECIATE THE ITA NO.462/MDS/2016 :- 8 -: FACT THAT THE INVESTMENT MADE IN KIRAN MEDICAL SYST EMS PRIVATE LTD WAS NOT FINANCIAL IN NATURE WITH AN INTENTION TO EARN DIVID END INCOME. IT WAS THE INTENTION AND AGREEMENT BETWEEN THE ASSESSEE AND THE SELLER THAT THE ASSESSEE WILL ACQUIRE 100% SHAREHOLDING IN A PHASE D MANNER OVER A PERIOD OF THREE YEARS AND MAKE KIRAN MEDICAL SYSTEMS PRIVATE LTD AS ITS 100% SUBSIDIARY. THE INTENTION WAS TO MERGE KIRAN MEDICA L SYSTEMS PRIVATE LTD WITH ITSELF ONCE IT BECOMES 100% SUBSIDIARY. THIS INTENT ION HAS BEEN FULFILLED IN 2015 AS KIRAN MEDICAL SYSTEMS LTD WAS MERGED WITH T RINITRON HEALTHCARE PRIVATE LTD VIDE COURT ORDER DATED 28TH APRIL 2015. THE APPOINTED DATE FOR THIS MERGER WAS APRIL 2011. THE INVESTMENT IN ALLIANCE M EDICORP WAS ALSO MADE FOR STRATEGIC REASONS AS ALLIANCE MEDICORP WAS ENGAG ED IN DIALYSIS BUSINESS AND THE ASSESSEE WAS ENGAGED IN DISTRIBUTION DIALYSIS EQUIPMENTS AND CONSUMABLES AND BOTH BUSINESSES HAVE GREAT SYNERGY BETWEEN THEM. THE INVESTMENTS IN KIRAN MEDICAL SYSTEMS PRIVATE LTD WE RE MADE FOR THE PURPOSE OF ITS BUSINESS AND IN THE COURSE OF ITS BUSINESS. EVEN IF THE INVESTMENTS HAD COME OUT OF INTEREST BEARING FUNDS, THE INTEREST ON SUCH INVESTMENTS CANNOT BE DISALLOWED AS THE INVESTMENT WAS MADE WITH AN IN TENTION TO BROAD BASE, STABILIZE AND IMPROVE THE BUSINESS OF THE APPELLANT AND SUCH INVESTMENT WAS PURELY FOR THE PURPOSE OF BUSINESS OF THE APPELLANT . IN THIS REGARD, THE AR RELIED ON THE RATIO PRESCRIBED BY THE APEX COURT IN THE CASE S.A. BUILDERS LTD (288 ITR 1) AND JURISDICTIONAL HIGH COURT DECI SION IN THE CASE OF CIT VS RPG TRANSMISSIONS LTD (359 ITR 673-MDS) WHEREIN IT IS HELD THAT INTEREST ITA NO.462/MDS/2016 :- 9 -: PAID ON BORROWINGS THAT WERE USED TO ACQUIRE SHARES OF GROUP COMPANY, WHICH IS ENGAGED IN POWER GENERATION AND DISTRIBUTION, IS AN ALLOWABLE DEDUCTION UNDER SECTION 36(1)(III) IN AS MUCH AS BOTH BUSINES SES HAVE GREAT NEXUS AND THE INVESTMENT WAS NOT MADE WITH AN INTENTION TO EA RN DIVIDEND INCOME .INVITED OUR ATTENTION TO THE RELEVANT FINDINGS OF THE HIGH COURT AS UNDER : THE TRIBUNAL, IN CONSIDERATION OF APPEAL OF THE A SSESSEE IN PARAGRAPH 35 OF THE ORDER DATED JANUARY 23, 2006, HAS DEALT WITH TH IS ISSUE AT LENGTH. THE TRIBUNAL HAS FOUND THAT THERE IS PROXIMATE NEXUS BE TWEEN THE BUSINESS OF THE ASSESSEE-COMPANY AND THAT OF THE COMPANY IN WHICH I NVESTMENTS WERE MADE IN THE FORM OF SHARES. IT MAY BE TRUE THAT THE RETURNS ARE NOT COMMENSURATE WITH THE EXPECTED RETURNS IN THE FORM OF INTEREST, BUT I F AND WHEN, THE SHARES ARE LIQUIDATED, THERE IS EXPECTANCY OF SUBSTANTIAL GAIN S WHICH FACT HAS BEEN GLOSSED OVER BY THE ASSESSING OFFICER WHILE CONFINING HIS F INDINGS THAT THE RETURNS ARE FAR BELOW THE QUANTUM OF INTEREST PAID ON THE BORRO WED FUNDS AND, THEREFORE, THE BASIS OF ANALYZING THAT THE PAYMENT OF INTEREST ON BORROWED FUNDS HAS TO BE TESTED ON THE GROUND OF QUANTUM OF RETURN IS UNTENA BLE.FURTHERMORE, AS RIGHTLY POINTED OUT BY THE LEARNED SENIOR COUNSEL FOR THE A SSESSEE, SECTION 36(1)(III)OF THE ACT DOES NOT CONTEMPLATE ANY TEST THAT THE AMOU NTS SO INVESTED SHOULD BE WHOLLY AND EXCLUSIVELY FOR MAKING OR EARNING SUCH INCOME. ON A PLAIN READING OF SECTION 36(1)(III), WE DO NOT FIND ANY SUCH REQU IREMENT MANDATED IN THE SECTION TO CONFINE SUCH EXPENSE. FURTHERMORE, THE S ECTION ALSO DOES NOT PLACE ANY EMBARGO FOR INVESTMENTS TO BE MADE IN GROUP CON CERNS AND SUBSIDIARY CONCERNS. THEREFORE, WE ARE NOT IN AGREEMENT WITH T HE FINDINGS OF THE COMMISSIONER OF INCOME-TAX (APPEALS) AND CONCUR WIT H THE FINDINGS OF THE TRIBUNAL IN THIS REGARD. IN OUR JUDGMENT IN THE TAX CASE APPEAL IN T. C. (A.) NO. 1980 OF 2008, (SINCE REPORTED IN CIT V. SPENCERS AND CO. LTD. (N O.3 (2013] 359 ITR 644 (MAD) WHICH WAS HEARD ALONG WITH THESE APPEALS AND DISPOSED OF TODAY, WE HAVE ELABORATELY DISCUSSED THE ISSUE RELATING TO PA YMENT OF INTEREST ON BORROWED CAPITAL AND THE REASONS GIVEN BY US IN THE SAID JUDGMENT FOR SUSTAINING THE ORDER OF THE TRIBUNAL ARE ALSO APPLI CABLE TO THE PRESENT APPEALS. ITA NO.462/MDS/2016 :- 10 -: WE HAVE CAREFULLY SCRUTINIZED THE REASONS GIVEN BY THE APPELLATE AUTHORITY AND THE TRIBUNAL FOR ALLOWING THE ASSESSEES CLAIM OF INTEREST PAID ON BORROWED CAPITAL. THE APPELLATE AUTHORITY AND THE TRIBUNAL F OUND THAT THE INVESTMENT MADE BY THE ASSESSEE BY UTILIZING BORROWED CAPITAL WAS FOR STRATEGIC BUSINESS PURPOSES BECAUSE THE COMPANIES WERE PROMOTED AS SPE CIAL PURPOSE COMPANIES TO STRENGTHEN AND PROMOTE ITS EXISTING BUSINESS BY COMBINING DIFFERENT BUSINESS SEGMENTS AND, THEREFORE, THE CLAIM WAS FULLY ALLOWA BLE UNDER SECTION 36(1)(III). WE ALSO FOUND THAT THE REVENUE DID NOT ADDUCE ANY M ATERIAL TO SHOW THAT THE BORROWED CAPITAL WAS UTILIZED BY THE ASSESSEE FOR N ON-BUSINESS PURPOSES. THE APPELLATE AUTHORITY, IN OUR CONSIDERED VIEW, WAS CO RRECT IN ALLOWING THE CLAIM OF THE ASSESSEE AND DELETING THE DISALLOWANCE MADE BY THE ASSESSING AUTHORITY. WE ALSO FIND THAT THE TRIBUNAL IN CORRECT APPRECIAT ION OF THE MATTER HAD IN TURN CONFIRMED THE FINDING OF THE APPELLATE AUTHORITY. W E SEE NO REASON TO INTERFERE WITH THE ORDER PASSED BY THE TRIBUNAL. 4.2 SIMILAR FINDINGS HAVE BEEN GIVEN BY THE CHENNAI ITAT IN THE CASE OF NMS CONSULTANCY PRIVATE LTD VS DCTO - COMPANY CIRCL E - ITA NO: 1523/MDS/2012. THE TRIBUNAL HELD THAT ACQUISITION O F SHARES AND PLACING OF SHARE APPLICATION MONEY WAS IN THE COURSE OF BUSINE SS OF THE ASSESEE AND HENCE THERE CAN BE NO DISALLOWANCE UNDER SECTION 36 (1) (III) OF THE ACT. THE ARGUMENT OF THE AO THAT ONLY PART CONTROL IS TAKEN UP (NAMELY 26%) AND THAT UNTIL 100% ACQUISITION IS MADE, IT CANNOT BE SAID T HAT THE CAPITAL ASSET HAS BEEN PUT TO USE AND HENCE INTEREST IS DISALLOWED U/ S36(1)(III) IS ERRONEOUS AND CONTRARY TO LAW . THE PROVISIONS OF SECTION 36(1) ( III) IS APPLICABLE ONLY IN RESPECT OF CERTAIN ASSETS LIKE FACTORY BUILDING, PL ANT AND MACHINERY ETC... AND IS NOT APPLICABLE FOR INVESTMENTS IN SHARES OF COMPANI ES. THE TERM PUT TO USE HAS BEEN USED IN THE INCOME TAX ACT ONLY WITH REFE RENCE TO ACQUISITION OF FIXED ASSETS AND HAS NO APPLICATION TO ACQUISITION OF INVESTMENTS. HENCE, IT IS ITA NO.462/MDS/2016 :- 11 -: SUBMITTED THAT SECTION 36(1)(III) WHICH IS MEANT TO DISALLOW INTEREST PAID ON ACQUISITION OF FIXED ASSETS HAS BEEN ERRONEOUSLY IN VOKED HERE TO DENY THE APPELLANT A LEGITIMATE CLAIM OF INTEREST ON THE AMO UNT BORROWED FOR WORKING CAPITAL PURPOSE. BESIDES, DISALLOWING INTEREST ON W ORKING CAPITAL FUNDS, THE AO HAS ALSO INVOKED SECTION 14 A TO DISALLOW EXPENDI TURE RELATABLE TO EXEMPTED INCOME. IT IS SUBMITTED THAT THERE CANNOT BE DOU BLE DISALLOWANCE, NAMELY UNDER SECTION 14 A READ WITH RULE 8D AND UNDER SECT ION 36(1)(III) . ONCE SECTION 14 A IS INVOKED THERE CANNOT BE ANOTHE R DISALLOWANCE UNDER SECTION 36(1)(III). 4.3 THE AR FURTHER SUBMITTED THAT AFTER CONSID ERING THE RELEVANT MATERIAL AND THE ASSESSEES PLEA, THE CIT (A) HAS RIGHTLY CONCLUDED AS UNDER : 5. .. I HAVE GONE THROUGH THE ASSESSMENT ORDER, THE WRITTEN SUBM ISSIONS, GROUNDS AND ALSO CONSIDERED THE ADDITIONAL SUBMISSIONS MADE BEF ORE ME BY THE AR IN ADDITION TO THE VARIOUS DECISIONS QUOTED. FROM THE SUBMISSIONS MADE BY THE AR IT CAN BE CONCLUDED THAT (1) THE ENTIRE INVESTMENTS HAVE BEEN MODE OUT OF OW N FUNDS AND RETAINED EARNINGS AND NO INTEREST BEARING FUNDS HAVE BEEN US ED FOR ACQUIRING THESE INVESTMENTS; (2) THERE HAS BEEN NO CLAIM OF EXEMPTED INCOME A ND NO EXPENDITURE HAS BEEN INCURRED RELATED TO THESE INVESTMENTS; (3) INVESTMENTS MADE BY THE ASSESSE IN THE SUB SIDIARY COMPANY WERE NOT ON ACCOUNT OF INVESTMENT FOR EARNING CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVESTMENTS HAD BEEN MADE BY THE ASSESSEE TO PROMOT E SUBSIDIARY COMPANY AND WERE ON ACCOUNT OF BUSINESS EXPEDIENCY AND DIVI DEND THERE FROM IS PURELY INCIDENTAL. ITA NO.462/MDS/2016 :- 12 -: BASED ON THE ABOVE FACTS COUPLED WITH THE VARIOUS D ECISIONS QUOTED BY THE APPELLANT IN ITS FAVOUR, I HAVE NO HESITATION TO HO LD THAT THE ACTION OF THE AO IN ADDING RS.10,92,205/- AND RS.2,14,50,000/- IS INCOR RECT AN ACCORDINGLY THESE ADDITIONS ARE DIRECTED TO BE DELETED. HENCE ALL THE GROUNDS RAISED ARE ALLOWED. AND HENCE PLEADED THAT THE ORDER OF THE CIT (A) MA Y BE UPHELD. 5. WE HEARD THE RIVAL CONTENTIONS. THE ASSESSEE C LAIMS THAT THERE CAN BE NO DISALLOWANCE UNDER SECTION 14A IN THE ABSENCE OF CLAIM OF EXEMPTED INCOME. SIMILAR ISSUE AROSE IN THE CASE OF CIT, CEN TRAL 1, CHENNAI VS M/S. CHETTINAD LOGISTICS PVT. LTD BEFORE THE HONBLE M ADRAS HIGH COURT. THE RELEVANT PORTION IN ITS ORDER IN TCA NO. 24 OF 2 017, DATED 13.03.2017 IS EXTRACTED AS UNDER: THE ONLY ISSUE, WHICH AROSE FOR CONSIDERATION, BEF ORE THE TRIBUNAL, WAS, WHETHER AN ADDITION MADE IN THE SUM OF RS. 86,62,74 8/- QUA, THE ASSESSEE, BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT, READ WITH, RULE 8D OF THE INCOME TAX RULES, 1962 (IN SHORT, THE RULES) WAS VA LID. 5.1 THE OPERATIVE PORTION OF THE JUDGMENT IS EXTRAC TED AS UNDER: 16. TO OUR MINDS, QUESTIONS OF LAW, WHICH COULD H AVE ARISEN ARE ALREADY COVERED BY THE JUDGEMENT OF A CO-ORDINATE B ENCH OF THIS COURT RENDERED IN M/S. REDINGTON (INDIA) LIMITED CASE. 5.2 THE HONBLE HIGH COURT OF MADRAS IN THE CASE OF REDINGTON (INDIA) LTD. VS. ADDL CIT IN TCA NO. 520 OF 2016 DATED 23.1 2.2016 HELD THAT IN CONCLUSION, WE ARE OF THE VIEW THAT THE PROVISIONS OF SECTION 14A R.W.R. 8D OF THE RULES CANNOT BE MADE APPLICABLE IN A VACUUM I.E . IN THE ABSENCE OF ITA NO.462/MDS/2016 :- 13 -: EXEMPT INCOME. SINCE IN THIS CASE, THERE IS NO EXEMPT INCOME, APPLYING THE RATIOS IN THE ABOVE JUDGMENTSA, THE DELETI ON OF THE ADDITION MADE U/S 14A , AS DIRECTED BY THE CIT (A) , DOES NOT REQUIR E INTERFERENCE AND HENCE T HE REVENUES CORRESPONDING GROUNDS FAIL. 6. THE NEXT ISSUE IS THE DISALLOWANCE MADE UNDER S ECTION 36 (1) (III). IN THIS REGARD, IT IS CLEAR FROM THE FACTS AND THE RAT IOS CANVASSED BY THE ASSESSEEE , SUPRA, THAT THE A O HAS FAILED TO A PPRECIATE THE FACT THAT THE INVESTMENTS MADE IN KIRAN MEDICAL SYSTEMS PRIVATE LTD WAS FOR STRATEGIC IN NATURE. BOTH THE ASSESSEE AND KIRAN MEDICAL S YSTEMS PRIVATE LTD ARE ENGAGED IN SAME HEALTHCARE BUSINESS WHILE THE APPEL LANT IS SELLING / DISTRIBUTING IMAGING EQUIPMENTS AND MACHINERIES SUCH AS CT, MR, X-RAY MACHINES , ULTRA SOUND MACHINES ETC., KIRAN MEDICA L SYSTEMS PRIVATE LTD IS ENGAGED IN MANUFACTURE AND DISTRIBUTION OF CONSUMAB LES USED IN IMAGING BUSINESS, SUCH AS DIGITAL X RAY CASSETTES, CONTRAST MEDIA, X-RAY PROTECTION APPARELS ETC. BOTH BUSINESSES HAVE GREAT SYNERGY A ND THE ACQUISITION OF KIRAN MEDICAL SYSTEMS PRIVATE LTD WILL GREATLY ENHANCE TH E BUSINESS DYNAMICS OF THE ASSESSEE AND GIVE THEM A CLEAR EDGE IN TERM S OF PRODUCT RANGE, EXPORT OPPORTUNITIES, GEOGRAPHICAL SPREAD ETC AND HENCE THE IMPUGNED INVESTMENT IS MADE FOR THE PURPOSE OF ITS BUSINESS AND IN THE COURSE OF ITS BUSINESS. THE ASSESSEE ULTIMATELY ACQUIRED THE FULL CONTROL ON THE APPOINTED DATE, 1ST APRIL 2011. EVEN IF THE INVESTMENTS HAD COME OUT OF INTER EST BEARING FUNDS, THE ITA NO.462/MDS/2016 :- 14 -: INTEREST ON SUCH INVESTMENTS CANNOT BE DISALLOWED AS THE INVESTMENT WAS MADE WITH AN INTENTION TO BROAD BASE, STABILIZE AND IMPROVE THE BUSINESS OF THE ASSESSEE AND IT WAS FOR THE PURPOSE OF BUSIN ESS OF THE ASSESSEE AND THE ASSESSEES CASE FALLS WITHIN THE RATIOS RELI ED ON BY IT, SUPRA, AND HENCE THE DECISION OF THE CIT (A) IN DELETING THE DISALL OWANCE MADE U/S 36 (III) DOES NOT REQUIRE ANY INTERFERENCE. THE GROUNDS OF TH E REVENUE FAIL. 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON NOVEMBER 20 TH , 2017, AT CHENNAI. SD/- ( ... ) (N.R.S. GANESAN) /JUDICIAL MEMBER SD/ - ( ) ( S. JAYARAMAN ) /ACCOUNTANT MEMBER /CHENNAI, 2 /DATED: 20 TH NOVEMBER, 2017. TLN + )34 54 /COPY TO: 1. ( /APPELLANT 4. 6 /CIT 2. )*( /RESPONDENT 5. 4 ) /DR 3. 6 ( ) /CIT(A) 6. % /GF