DCIT, Hyderabad V. Nagarjuna fertilisers & Chemicals, Hyderabad

ITA 479/HYD/2009

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66474 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-11-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 30-06-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 09-04-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V SRINIVAS
• Keywords: Capital asset; Business income; Earning of tax free income; Proportionate interest; Notional interest; Capital receipt; Commercial expediency; Capital expenditure
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.438/HYD/2009 : ASSES SMENT YEAR 2004-05 M/S. NAGA RJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. ( PAN - AAACN 6618 J) V/S. DY. COMMISSIONER OF INCOME - TAX CIRCLE 16(1), HYDERABAD (APPELLANT) (RESPONDENT) AND ITA NO.479/HYD/2009 : ASSES SMENT YEAR 2004-05 DY. COMMISSIONER OF INCOME - TAX CIRCLE 16(1), HYDERABAD V/S. M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. ( PAN - AAACN 6618 J) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI A.SRINIVAS , AR DEPARTMENT BY : SHRI V.SRINIVAS DR DATE OF HEARING 28 . 8 .2012 DATE OF PRONOUNCEMENT 9.11.2012 O R D E R PER SAKTIJIT DEY, JUDICIAL MEMBER: THESE CROSS APPEALS ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE- ARE DIRECTED AGAINST THE ORDER OF THE CIT( A) V, HYDERABAD DATED 30.1.2009 FOR THE ASSESSMENT YEAR 2004-05. SINCE A COMMON ISSUE IS ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 2 INVOLVED, THESE APPEALS ARE BEING DISPOSED OFF WITH THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. WE FIRST DEAL WITH THE APPEAL OF THE ASSESSEE, BEING ITA NO.438/HYD/2009. THE ASSESSEE HAS RAISED AS MANY AS 15 GROUNDS. GROUND NO.1, 2 AND 15 ARE GENERAL AND HENCE NEED NO ADJUDI CATION. AT THE OUTSET, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSES SEE SUBMITTED THAT HE DOES NOT WANT TO PRESS GROUNDS NO.11 AND 12. HENCE , THESE TWO GROUNDS ARE ALSO DISMISSED AS NOT PRESSED. WE MAY PROCEED TO D EAL WITH THE REST OF THE GROUNDS HEREUNDER. 3. BY GROUNDS NO.3 AND 4, ASSESSEE CHALLENGES THE DIRECTION OF THE CIT(A) TO DISALLOW THE INTEREST LIABILITY FROM THE REMISSION OF LOAN LIABILITY. ON THIS VERY ISSUE, IT IS PERTINENT TO MENTION HERE , THE REVENUE HAS ALSO RAISED GROUNDS IN ITS APPEAL, ITA NO.475/HYD/2009, CONTESTING THE RELIEF GRANTED BY THE CIT(A). 4. BRIEFLY, THE FACTS ARE THAT THE ASSESSEE IS EN GAGED IN MANUFACTURING AS WELL AS TRADING ACTIVITIES OF FERT ILIZERS AND CHEMICALS. FOR THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE FIL ED ITS RETURN OF INCOME DECLARING NIL INCOME FROM BUSINESS AND A LOSS OF RS.18,51,52,647 UNDER THE HEAD CAPITAL GAINS. IN THE COURSE OF SCRUTINY ASSE SSMENT, THE ASSESSING OFFICER NOTICED THAT THERE WAS REMISSION OF LOAN LI ABILITY OF RS.8,41,00,728 BY ING VYSYA BANK, WHICH HAS NOT BEEN OFFERED TO TAX B Y THE ASSESSEE. THE ASSESSING OFFICER, VIDE LETTER DATED 11.8.2006, ASK ED THE ASSESSEE TO EXPLAIN THE NATURE OF THE RECEIPT. IN RESPONSE TO THE QUERY OF THE ASSESSING OFFICER, THE ASSESSEE SUBMITTED THAT IT HAS NOT CLAIMED ANY TAX BENEFIT ON THE AMOUNT OF RS.8,41,00,728, WHICH WAS WAIVED BY THE ING VYSY A BANK. THE ASSESSEE ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 3 SUBMITTED THAT THE REMISSION WAS OF PRINCIPAL AMOUN T, AS A RESULT OF ONE TIME SETTLEMENT OF ASSESSEES LOAN ACCOUNT. THE ASSESSEE SUBMITTED THAT THE REMISSION OF THE ASSESSEES LIABILITY, BEING OF PRI NCIPAL, IT IS CAPITAL IN NATURE AND HENCE NOT TAXABLE. THE ASSESSEE SUBMITTED THAT SECTION 41(1)(A) COVERS ONLY CASES OF CESSATION OF LOSS/EXPENDITURE OR BEN EFIT/TRADING LIABILITY IN RESPECT OF WHICH BENEFIT WAS CLAIMED. IN RESPONSE TO THE FURTHER QUERY OF THE ASSESSING OFFICER, AS TO WHY THE AMOUNT SHOULD NOT BE ADDED U/S. 28(IV) OF THE ACT, THE ASSESSEE IN ITS LETTER DATED 13.10.200 6 SUBMITTED THAT THE REMISSION OF PRINCIPAL AMOUNT OF LOAN BY THE BANK I S IN THE NATURE OF CAPITAL RECEIPT AND CANNOT BE BROUGHT TO TAX AS A REVENUE R ECEIPT WITHIN THE MEANING OF SECTION 28(IV) OF THE ACT. THE ASSESSEE, IN SUP PORT OF HIS CONTENTION THAT THE REMISSION OF THE LIABILITY WILL NOT COME WITHI N THE AMBIT OF S.41(1) OF THE ACT, RELIED UPON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF MAHINDRA & MAHINDRA V/S. CIT(261 ITR 501). 5. THE ASSESSING OFFICER HOWEVER, DID NOT ACCEPT T HE CONTENTIONS OF THE ASSESSEE BY OBSERVING THAT THE FACTS IN THE CAS E OF MAHINDRA & MAHINDRA (SUPRA) ARE DIFFERENT FROM THE FACTS INVOLVED IN TH E CASE OF THE ASSESSEE HEREIN. HE HELD THAT THE REMISSION OF THE LOAN LIA BILITY IS TO BE TREATED AS INCOME OF THE ASSESSEE AND TAXABLE IN THE HANDS OF THE ASSESSEE UNDER S.28(IV) READ WITH S.41(1) OF THE ACT. THE ASSESSI NG OFFICER FURTHER HELD THAT IF THE AMOUNT CANNOT BE CONSIDERED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION, THE SAME HAS TO BE CONSIDE RED UNDER THE HEAD INCOME FROM OTHER SOURCES. THE ASSESSING OFFICER DISTINGUISHING THE DECISION RELIED UPON BY THE ASSESSEE IN THE CASE OF DCIT V/S. CONFOUND FINANCIAL SERVICES (2000) 111TAXMAN 446 HELD THAT R EMISSION OF LIABILITY OF LOAN BY THE BANK HAS TO BE TREATED AS ASSESSEES IN COME. ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 4 6. THE ASSESSEE CHALLENGED THE ADDITION BEFORE TH E CIT(A). IT WAS CONTENDED BY THE ASSESSEE BEFORE THE CIT(A) THAT S. 41(1) OF THE ACT, PRESUPPOSES ALLOWANCE OR DEDUCTION OF EXPENDITURE IN AN EARLIER ASSESSMENT YEAR. SINCE THE ASSESSEE HAS NOT BEEN ALLOWED ANY D EDUCTION REFERRED IN S.41(1) IN ANY EARLIER ASSESSMENT YEAR IN RESPECT O F THE PRINCIPAL PORTION OF THE LOAN, THE REMISSION OF PRINCIPAL AMOUNT IS NOT TAXABLE UNDER S.41(1) OF THE ACT. THE ASSESSEE SUBMITTED THAT THE ALLOWANCE FOR DEDUCTION REFERRED TO IN S.41(1) HAS TO BE IN RESPECT OF LOSS, EXPENDITUR E OR TRADING LIABILITY AND THE REMISSION HAS TO BE IN RESPECT OF THE VERY SAME, I. E. LOSS, EXPENDITURE OR TRADING LIABILITY TO ATTRACT THE PROVISIONS OF S.41 (1). THE ASSESSEE FURTHER SUBMITTED THAT SINCE REMISSION OF RS.8,41,00,728 IS IN RESPECT OF PRINCIPAL PORTION OF THE LOAN, THE SAME IS NOT CHARGEABLE TO TAX EITHER UNDER S.41(1) OR UNDER S.28(IV) OF THE ACT. IN THIS REGARD, THE ASSE SSEE RELIED UPON THE DECISIONS IN THE CASES OF MAHINDRA & MAHINDRA LTD V /S. CIT (SUPRA); CIT V/S. CHETAN CHEMICALS P. LTD. (267 ITR 770) AND HELIOS F OOD IMPROVER P. LTD. V/S. DCIT (14 SOT 546). THE ASSESSEE BY WAY OF FU RTHER CLARIFICATION SUBMITTED THAT THE LOAN WAS RAISED FOR THE PURPOSE OF FINANCING CAPITAL EXPENDITURE SUCH AS BUILDING, PLANT AND MACHINERY, ETC. THE TOTAL DEBT OUTSTANDING WAS RESTRUCTURED UNDER CORPORATE RESTRU CTURING PROGRAMME. THE ING VYSYA BANK HAS GIVEN REMISSION OF LOAN WHICH WA S CREDITED TO THE PROFIT & LOSS ACCOUNT UNDER CDR SCHEME. 7. THE CIT(A), CONSIDERING THE SUBMISSIONS OF TH E ASSESSEE IN THE CONTEXT OF THE RATIO LAID DOWN IN THE CASE OF MAHIN DRA & MAHINDRA V/S. CIT (SUPRA); CHETAN CHEMICALS P.LTD. (SUPRA) AND APR L TD V/S. DCIT (87 ITD 618), HELD THAT THE PRINCIPAL AMOUNT OF LOAN WAIVED BY THE LENDER, VIZ. ING VYSYA BANK IS NOT CHARGEABLE TO TAX. THE CIT(A) FU RTHER RELIED UPON THE DECISION OF THE INCOME-TAX APPELLATE TRIBUNAL CHENN AI BENCH IN FIDELITY ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 5 TEXTILES P. LTD. V/S. ACIT(305 ITR (AT)97), WHEREIN IT WAS HELD THAT THE SUM RECEIVED AS WAIVER OF LOAN, WHEN LOAN WAS OBTAINED FOR PURCHASE OF CAPITAL ASSET, DOES NOT CONSTITUTE INCOME WITHIN THE MEANIN G OF S.2(24) OF THE ACT. THE CIT(A) ALSO RELIED UPON THE DECISION OF THE INC OME-TAX APPELLATE TRIBUNAL, HYDERABAD BENCH IN THE CASE OF ACIT V/S. POLY HI SOLIDUR PLASTICS (INDIA ) LTD. IN ITA NO.715/HYD/1994, WHEREIN THE T RIBUNAL HELD THAT PRINCIPAL AMOUNT OF LOAN WHICH WAS WAIVED IS NOT SUBJECT TO T AX UNDER S.2(24) OR UNDER S.41(1) OF THE ACT . THE CIT(A), FOLLOWING THE AFORESAID DECISION CAME TO A CONCLUSION THAT THE REMISSION OF PRINCIPAL AMO UNT OF LOAN BY ING VYSYA BANK IS NOT TAXABLE IN THE HANDS OF THE ASSESSEE. THE CIT(A), HOWEVER, DID NOT ACCEPT THE CLAIM OF THE ASSESSEE THAT THE ENTIR E AMOUNT OF RS.8,41,00,728 IS TOWARDS WAIVER OF PRINCIPAL AMOU NT OF LOAN. THE CIT(A) NOTED THAT THE LETTER DATED 21.2.2004 OF ING VYSYA BANK LTD TO THE ASSESSEE REVEALED THAT THE AMOUNT OF RS.8,41,00,728 WAIVED B Y THE BANK ALSO INCLUDES INTEREST COMPONENT WHICH IS TAXABLE UNDER S.41(1) O F THE ACT. THE CIT(A) THEREFORE, DIRECTED THE ASSESSING OFFICER TO TAX TH E INTEREST COMPONENT ALONE AT THE HANDS OF THE ASSESSEE. 8. AGGRIEVED BY THE ADDITION SUSTAINED BY THE CIT( A), ASSESSEE IS IN APPEAL BEFORE US, WHEREAS THE REVENUES SOLE GRIEV ANCE IN THE APPEAL PREFERRED BY IT IS AGAINST THE RELIEF GRANTED BY TH E CIT(A) IN RELATION TO THIS ISSUE. 9. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE, ASSAILING THE AFORESAID DIRECTION OF THE CIT(A) TO TAX THE INTEREST COMPONENT, SUBMITTED THAT THE LOAN WAS TAKEN FROM ING VYSYA BA NK IN THE YEAR 2001 WAS FOR FINANCING CAPITAL ASSETS LIKE BUILDINGS, PL ANT AND MACHINERY, ETC. IN THIS CONTEXT, THE LEARNED AUTHORISED REPRESENTATIV E FOR THE ASSESSEE INVITED ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 6 OUR ATTENTION TO BANK STATEMENT, COPY OF WHICH I S AT PAGE 59 OF THE PAPER- BOOK. THE LEARNED AUTHORISED REPRESENTATIVE FOR TH E ASSESSEE SUBMITTED THAT THE ASSESSEE NEVER CLAIMED ANY DEDUCTION TOWARDS T HE LOAN LIABILITY IN THE EARLIER YEARS. THE AMOUNT OF RS.8,41,00,728 WAIVED BY THE BANK UNDER THE OTS IS ALSO ONLY PRINCIPAL COMPONENT AND THERE IS N O INTEREST COMPONENT THEREIN, WHICH COULD BE DISALLOWED U/S. 41(1) OF TH E ACT. IN THIS CONTEXT, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE REFERRED TO THE CERTIFICATE ISSUED BY THE BANK, WHICH IS AT PAGE 64 OF THE PAPE R-BOOK, WHICH STATES THAT THE ENTIRE AMOUNT WAS ADJUSTED TOWA4DS PRINCIPAL PO RTION OF THE LIABILITY. 10. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMI TTED THAT THE FACTS ARE NOT CLEAR AS TO WHETHER THE LOAN GIVEN BY THE BANK WAS A TERM LOAN OR WORKING CAPITAL LOAN. SINCE THE NOTES ON ACCOUN T FORMING PART OF THE AUDIT REPORT STATES THAT THE PACKAGE FOR CORPORATE DEBT R ESTRUCTURING ALSO INCLUDES WORKING CAPITAL. IN THIS CONTEXT, THE LEARNED DEPA RTMENTAL REPRESENTATIVE REFERRED TO THE NOTES ON ACCOUNT AT PAGE 36 OF THE PAPER BOOK. THE LEARNED DEPARTMENTAL REPRESENTATIVE FURTHER SUBMITTED THAT THE DECISION OF THE HOBLE BOMBAY HIGH COURT IN THE CASE OF MAHINDRA & MAHINDRA V/S. CIT (SUPRA), CITED BY THE ASSESSEE AND RELIED UPON BY THE CIT(A), IS NO LONGER GOOD LAW BECAUSE OF SUBSEQUENT DECISION OF THE HON BLE BOMBAY HIGH COURT IN SOLID CONTAINER LTD. V/S. DCIT (308 ITR 417), W HEREIN THE DECISION IN THE CASE OF MAHINDRA & MAHINDRA LTD. (SUPRA) WAS REVIEW ED. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS FURTHER RELIED ON T HE FOLLOWING DECISIONS ALSO- (A) LOGITRONICS PVT. LTD. V/S. CIT(333 ITR 386)-DEL . (B) ROLLATAINRS LTD. V/S. CIT (339 ITR 54)-DEL. ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 7 11. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUS ED THE MATERIALS ON RECORD. WE HAVE ALSO EXAMINED THE DECISIONS RELI ED UPON BY THE PARTIES. THE ISSUES BEFORE US ARE AS TO WHETHER THE REMISSIO N OF LIABILITY OF ING VYSYA BANK AMOUNTING TO RS.8,41,00,728 CAN BE TREATED AS INCOME OF THE ASSESSEE EITHER UNDER S.28(IV) OF THE ACT OR UNDER S.41(1) O F THE ACT AND WHETHER THE CIT(A) WAS JUSTIFIED IN HOLDING THAT THE INTEREST C OMPONENT OF THE AMOUNT WAIVED IS LIABLE TO BE TAXED UNDER S.41(1) OF THE A CT. AS CAN BE SEEN FROM THE FACTS ON RECORD THAT IT IS THE SPECIFIC CONTENT ION OF THE ASSESSEE BEFORE THE LOWER AUTHORITIES THAT THE REMISSION OF LIABILITY O F RS.8,41,00,728 IS ONLY TOWARDS THE PRINCIPAL AMOUNT AND NO INTEREST COMPON ENT IS EMBEDDED THEREIN. THEREFORE, THE DIRECTION TO DISALLOW THE I NTEREST COMPONENT IS NOT SUSTAINABLE. IT IS ALSO THE CONTENTION OF THE ASSES SEE BEFORE US THAT THE WAIVED AMOUNT DOES NOT INCLUDE ANY INTERESTS COMPON ENT AND THAT BESIDES THE LOAN TAKEN BEING A TERM LOAN FOR THE PURPOSE OF PURCHASING CAPITAL ASSET, THE GAIN TO THE ASSESSEE ON ACCOUNT OF REMISSION OF LIABILITY, ALSO HAS TO BE TREATED AS A CAPITAL RECEIPT, AND HENCE NOT LIABLE TO TAX. IT WAS SUBMITTED THAT THERE IS NOTHING ON RECORD TO SUGGEST THAT THE AMOUNT SUBJECTED TO REMISSION REPRESENTS A TRADING LIABILITY. HOWEVER, IT IS THE CASE OF THE REVENUE THAT THE LOAN TAKEN IS NOT A TERM LOAN, BU T A LOAN TOWARDS WORKING CAPITAL ALSO, AND THEREFORE, THE NATURE OF LOAN SUB JECTED TO REMISSION CANNOT BE TREATED AS A CAPITAL RECEIPT. IN THIS FACTUAL B ACKGROUND, LET US EXAMINE THE RATIO LAID DOWN IN THE DECISIONS RELIED UPON BEFORE US. 12. IN THE CASE OF MAHINDRA & MAHINDRA LTD. (SUPR A), THE HONBLE BOMBAY HIGH COURT, WHILE CONSIDERING THE LOAN AGREE MENT, WHICH WAS FOR IMPORT OF PLANT AND MACHINERY, HELD THAT SINCE THE LOAN WAS FOR PURCHASE OF CAPITAL ASSET, THE AMOUNT WAIVED CANNOT BE TREATED AS INCOME OF THE ASSESSEE EITHER UNDER S.28(IV) OR UNDER S.41(1) OF THE ACT. IT IS SEEN THAT SIMILAR VIEW HAS ALSO BEEN TAKEN BY THE HONBLE GUJ ARAT HIGH COURT IN THE ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 8 CASE OF CHETAN CHEMICALS P. LTD. (SUPRA). IT IS TH E CONSISTENT VIEW TAKEN BY DIFFERENT BENCHES OF THIS TRIBUNAL IN SIMILAR MATTE RS THAT WAIVER OF LOAN WHICH WAS OBTAINED FOR PURCHASE OF A CAPITAL ASSET DO NOT CONSTITUTE INCOME WITHIN THE MEANING OF S.2(24) OF THE ACT AND THEREFORE, WI LL NOT BE TAXABLE EITHER UNDER S.28(IV)OR UNDER S.41(1) OF THE ACT. WE ARE NOT IN AGREEMENT WITH THE CONTENTIONS OF THE LEARNED DEPARTMENTAL REPRES ENTATIVE THAT THE HONBLE BOMBAY HIGH COURT THAT THE DECISION IN THE CASE OF MAHINDRA & MAHINDRA LTD. (SUPRA) IS NO LONGER GOOD LAW IN VIEW OF THE SUBSEQ UENT DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SOLID CON TAINERS LTD. (SUPRA), AS IN THE SAID LATER DECISION, THE HONBLE BOMBAY HIGH CO URT HAS NOT MADE ANY SUCH COMMENT. AFTER GOING THROUGH THE DECISION IN THE CASE OF SOLID CONTAINERS LTD. (SUPRA), WE FIND THAT THE FACTS INV OLVED IN THAT CASE ARE DIFFERENT FROM THE FACTS INVOLVED IN THE CASE BEFOR E US. IN THE CASE OF SOLID CONTAINERS (SUPRA), THE SPECIFIC FINDING OF FACT IS THAT THE LOAN WAS TAKEN FOR TRADING ACTIVITY AND ULTIMATELY, UPON WAIVER OF THE LOAN, THE AMOUNT WAS RETAINED IN THE BUSINESS BY THE ASSESSEE, AND THERE FORE, IT BECAME ASSESSEES INCOME AND THEREFORE, WAS HELD AS ASSESSABLE. THE OTHER DECISIONS CITED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE ARE ALSO FA CTUALLY DISTINGUISHABLE, SINCE IN THE FACTS OF THE PRESENT CASE, IT IS QUITE CLEAR THAT THE LOAN TAKEN WAS A TERM LOAN, UTILISED FOR THE PURPOSE OF ACQUIRING CAPITAL ASSET, LIKE BUILDING, PLANT AND MACHINERY, ETC. 13. IN THE LIGHT OF THE JUDICIAL PRONOUNCEMENTS D ISCUSSED ABOVE, WE ARE OF THE CONSIDERED VIEW THAT THE REMISSION OF LI ABILITY, INSOFAR AS IT RELATES TO PRINCIPAL AMOUNT CANNOT BE MADE TAXABLE IN THE H ANDS OF THE ASSESSEE EITHER UNDER S.28(IV). HOWEVER, IN THE EVENT OF TH E ASSESSEE, SECURING ANY RELIEF OR BENEFIT BY WAY OF DEDUCTION, IN ANY OF TH E EARLIER YEARS IN RELATION TO THE AMOUNT UNDER REMISSION, THE AMOUNT TO THE EXTEN T OF SUCH RELIEF OR ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 9 BENEFIT OBTAINED, HAS TO BE TREATED AS THE INCOME O F THE ASSESSEE FOR THE YEAR UNDER APPEAL IN TERMS OF S.41(1) OF THE ACT. FROM THE FACTS ON RECORD, IT IS NOT CLEAR WHETHER THE AMOUNT OF RS.8,41,00,728 COMP RISES OF EITHER PRINCIPAL OR INTEREST OR BOTH OR WHETHER THE ASSESSEE HAS OBT AINED ANY BENEFIT IN RELATION TO THAT SUM IN ANY OF THE EARLIER YEARS. THOUGH THE ASSESSEE HAS CLAIMED THAT THE ENTIRE AMOUNT OF RS.8,41,00,728, R EPRESENTS THE PRINCIPAL COMPONENT ONLY AND IN SUPPORT OF THIS CONTENTION, RELIANCE IS PLACED ON THE LETTER OF THE BANK DATED 16.3.2009, IT CANNOT BE AC CEPTED ON THE FACE OF IT. IF THAT BE THE CASE, THE ASSESSEE, IN OUR VIEW, CAN NOT HAVE ANY GRIEVANCE AGAINST THE DIRECTION OF THE CIT(A) TO THE ASSESSIN G OFFICER TO VERIFY AND RESTRICT THE DISALLOWANCE ONLY TO THE INTEREST ELEM ENT, IF ANY, EMBEDDED IN THE AMOUNT UNDER REMISSION. AS FOR LETTER OF THE BANK, WHEREIN IT HAS BEEN STATED THAT THE AMOUNT UNDER REMISSION REPRESENTS THE PRIN CIPAL COMPONENT OF THE LOAN, WE ARE OF THE VIEW THAT THE EXPRESSION PRINC IPAL IN THE SAID LETTER CANNOT BE SEEN IN ISOLATION OR IN ITS STRICT SENSE. IT CANNOT BE THAT THE SUM OF RS.8,41,00,728, WHICH WAS UNDER REMISSION, WAS THE AMOUNT OF LOAN TAKEN BY THE ASSESSEE FROM THE BANK IN 2001. SEVERAL AMOUNTS OF INTEREST MUST HAVE ACCRUED AND GOT ADDED TO THE AMOUNT OF LOAN FROM TI ME TO TIME, ASSUMING THE CHARACTER OF PRINCIPAL OF THE LOAN ALONG WITH T HE BORROWED AMOUNT OF RS.8,41,00,728 AS REDUCED BY THE REPAYMENTS, IF ANY , BY THE ASSESSEE. THE ASSESSEE ITSELF, MUST HAVE REFLECTED SUCH AMOUNTS O F INTEREST ON THE LOAN IN ITS PROFIT & LOSS ACCOUNT FROM TIME TO TIME. THE TE RM PRINCIPAL MIGHT HAVE BEEN USED TO CONVEY THAT WHAT IS UNDER REMISSION IS THE ENTIRE AMOUNT DUE ON THE DAY OF REMISSION, SO THAT NOTHING REMAINS OU TSTANDING IN THE FORM OF PRINCIPAL SO AS TO RESULT IN ACCRUAL OF INTEREST EVEN AFTER REMISSION. THEREFORE, MERELY RELYING UPON THE EXPRESSION PRIN CIPAL USED IN THE SAID LETTER, ONE CANNOT CONCLUDE THAT THE AMOUNT OF RS.8 ,41,00,728 CONTAINS ONLY THE PRINCIPAL COMPONENT OF LOAN, AND NO ELEMENT OF INTEREST IS EMBEDDED ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 10 THEREIN. IN THE CIRCUMSTANCES, THE FACTUAL ASPECT A S TO THE COMPOSITION OF THE AMOUNT UNDER REMISSION, VIZ. RS.8,41,00,728, NEEDS TO BE EXAMINED FROM THE RECORDS BY THE ASSESSING OFFICER. THE ASSESSING O FFICER HAS ALSO TO VERIFY WHETHER THE ASSESSEE, IN ANY OF THE EARLIER YEARS, HAS CLAIMED ANY DEDUCTION OR RELIEF WITH REGARD TO THE SUM OF RS.8,41,00,728 VIZ. THE AMOUNT UNDER REMISSION. IN CASE ANY SUCH DEDUCTION OR RELIEF HA S BEEN OBTAINED BY THE ASSESSEE IN THE EARLIER YEARS, TO THAT EXTENT, SUCH RELIEF OR DEDUCTION HAS TO BE TREATED AS INCOME FOR THE YEAR UNDER APPEAL, IN TERMS OF S.41(1) OF THE ACT. 14. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AN D THE IN THE LIGHT OF THE FOREGOING DISCUSSION, WE FIND THAT THE MATTER N EEDS RE-EXAMINATION AT THE END OF THE ASSESSING OFFICER, TO ASCERTAIN THE COMP OSITION OF THE AMOUNT OF RS.8,41,00,728, AND RELIEF/DEDUCTION OBTAINED BY TH E ASSESSEE WITH REGARD TO THAT AMOUNT IN THE EARLIER YEARS, SO AS TO ARRIVE A T THE AMOUNT OF DISALLOWANCE THAT HAS TO BE MADE IN RELATION TO THE AMOUNT UNDER REMISSION, VIZ. RS.8,41,00,728. WE ACCORDINGLY SET ASIDE THE IMPUGNED ORDER OF THE CIT(A), AND RESTORE THE MATTER TO THE FILE OF THE A SSESSING OFFICER, FOR RE- EXAMINATION OF THE MATTER, KEEPING IN MIND OUR OBSE RVATIONS HEREINABOVE, AND IN ACCORDANCE WITH LAW, AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. CONSEQUENTLY, GROUNDS OF ASSESSEE AS WELL AS THE REVENUE ON THIS ISSUE ARE ALLOWED FOR STATISTICAL PURPOSES. 15. GROUNDS NO.5 AND 6 OF THE ASSESSEE RELATE TO D ISALLOWANCE OF NOTIONAL INTEREST AMOUNTING TO RS.2,80,65,000 ATTRI BUTABLE TO INVESTMENTS MADE IN SHARES OF SUBSIDIARY COMPANY. 16. BRIEFLY FACTS IN RELATION TO THIS ISSUE ARE TH AT IN THE COURSE OF ASSESSMENT PROCEEDINGS, WHILE EXAMINING THE FINAL ACCOUNTS OF THE ASSESSEE, ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 11 THE ASSESSING OFFICER NOTICED THAT DURING THE RELEV ANT FINANCIAL YEAR, THE ASSESSEE HAS MADE CONTRIBUTION OF RS.18.71 CRORES T OWARDS SHARES FROM NAGARJUNA OIL CORPORATION LTD. THE ASSESSING OFFIC ER WAS OF THE VIEW THAT THE CONTRIBUTION TO SHARES IS FOR THE PURPOSE OF EA RNING DIVIDEND INCOME, WHICH IS EXEMPT FROM TAX UNDER S.10(34) OF THE ACT. AS PER THE PROVISIOSN OF S.14A, NO DEDUCTION IS TO BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. THE ASSESSING OFFICER NOTICED THAT AS PER THE BALANCE S HEET AS ON 1.4.2003, THE ASSESSEE HAS OUTSTANDING LOANS OF RS.1700 CRORES FR OM BANKS AND FINANCIAL INSTITUTIONS. IT HAD NO RESERVES, THOUGH THE ASSES SEE EARNED SOME INCOME DURING THE YEAR. IN RESPONSE TO THE QUERY MADE BY THE ASSESSING OFFICER, AS TO WHY PROPORTIONATE INTEREST ATTRIBUTABLE TO THE I NVESTMENT MADE BY THE ASSESSEE IN M/S. NAGARJUNA OIL CORPORATION LTD. CAN NOT BE DISALLOWED, THE ASSESSEE SUBMITTED THAT THE INVESTMENT IN SHARES WA S NOT MADE OUT OF THE BORROWED FUNDS, BUT OUT OF THE PROFITS OF RS.103 CRORES EARNED BY THE ASSESSEE DURING THE YEAR. THE ASSESSING OFFICER HO WEVER DID NOT ACCEPT THE EXPLANATION SUBMITTED BY THE ASSESSEE BY OBSERVING THAT CHEQUES WERE ISSUED FROM ITS OVERDRAFT ACCOUNT MAINTAINED WITH S TATE BANK OF INDIA AND THAT APART, THE ASSESSEE WAS NOT HAVING ANY RESERVE S, WHEREAS OUTSTANDING LOANS WAS TO THE EXTENT OF RS.1700 CRORES FROM VA RIOUS FINANCIAL INSTITUTIONS AND BANKS. IN THE AFORESAID CIRCUMSTANCES, THE ASS ESSING OFFICER OBSERVED THAT THE PROFIT, IF ANY, EARNED BY THE ASSESSEE WOU LD HAVE GONE TO REDUCE THE BORROWED AMOUNT AND THERE WOULD NOT BE ANY FREE RES ERVES LEFT WITH THE ASSESSEE TO CONTRIBUTE FOR THE SHARES IN NAGARJUNA OIL CORPORATION LTD. THE ASSESSING OFFICER HELD THAT INTEREST ATTRIBUTABLE T O THE INVESTMENTS MADE IN THE SHARES OF THE NAGARJUNA OIL CORPORATION LTD. CO NSTITUTE INDIRECT EXPENDITURE INCURRED TO EARN EXEMPTED INCOME. THE ASSESSING OFFICER, RELYING UPON THE DECISION OF THE ITAT KOLKATA BENCH IN DCIT V/S. SG ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 12 INVESTMENTS AND INDUSTRY LTD.(89 ITD 44) HELD THAT THE ASSESSEE, ON ONE HAND WOULD GET INCENTIVE BY WAY OF EXEMPTION WITH R EGARD TO DIVIDEND INCOME, AND ON THE OTHER WOULD CLAIM EXPENDITURE AT TRIBUTABLE TO SUCH INVESTMENT, IN ORDER TO CLAIM EXEMPTED INCOME AGAIN ST ITS TAXABLE INCOME. THE ASSESSING OFFICER CAME TO THE CONCLUSION THAT T HE INTEREST ATTRIBUTABLE TO THE ASSESSEES INVESTMENT OF RS.18.71 CRORES MADE I N SHARES OF M/S. NAGARJUNA OIL CORPORATION LTD. HAS TO BE DISALLOWE D. THE ASSESSING OFFICER WORKED OUT SUCH INTEREST AT RS.2.80,65,000 BY CALCU LATING AT THE RATE OF 15%. 17. IN THE COURSE OF HEARING OF THE APPEAL BEFORE THE FIRST APPELLATE AUTHORITY, THE ASSESSEE CONTENDED THAT THE ASSESSEE IDENTIFIED OIL REFINERY BUSINESS AS A GREEN FIELD PROJECT, LIKELY TO HAVE G OOD RETURN ON INVESTMENT IN FUTURE. FURTHER, A BYE-PRODUCT (NAPHTHA) OF THE OI L REFINERY WILL BECOME A RAW MATERIAL FOR THE EXISTING FERTILIZER UNIT AT KA KINADA. KEEPING IN VIEW THE AFORESAID FACT, THE ASSESSEE INVESTED RS.18.71 CROR ES IN THE SHARES OF M/S. NAGARJUNA OIL CORPORATION LTD. THE ASSESSEE FURTHER SUBMITTED BEFORE THE CIT(A) THAT IT DECIDED TO ENTER OIL REFINING PROJEC T IN THE NATURE OF BACKWARD INTEGRATION TO THE EXISTING INDUSTRY OF THE ASSESSE E. IN THIS REGARD, THE ASSESSEE BROUGHT TO THE NOTICE OF THE CIT(A), THE M INUTES OF THE MEETING OF THE BOARD OF DIRECTORS OF THE ASSESSEE COMPANY DATE D 28.7.1997. IT WAS SUBMITTED THAT THE RESERVES OF THE ASSESSEE AS AT 3 1.3.2004 STOOD AT RS.732.40 CRORES. IT WAS SUBMITTED THAT THE INVEST MENT IN SHARES OF THE COMPANY WAS MADE OUT OF INTERNAL ACCRUALS AND THE SAME HAS NO RELATION TO THE TERM LOAN OUTSTANDING AS ON 31.3.2004. THE ASS ESSEE FURTHER DISPUTED THE FINDING OF THE ASSESSING OFFICER THAT THE AMOUN TS INVESTED WERE ROUTED THROUGH THE ASSESSEES OVERDRAFT ACCOUNT WITH STATE BANK OF INDIA. THE ASSESSEE FURTHER SUBMITTED THAT THE INVESTMENT IN S HARES OF NAGARJUNA OIL CORPORATION LTD. WAS NOT MOTIVATED BY THE DESIRE TO EARN EXEMPT INCOME, BUT ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 13 FOR THE PURPOSE OF BACKWARD INTEGRATION TO THE EXIS TING INDUSTRY OF THE ASSESSEE. IN SUPPORT OF HIS CONTENTION, THE ASSESS EE RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF S.A. BU ILDERS V/S. CIT (288 ITR 1)-SC. 18. THE COMMISSIONER OF INCOME-TAX(APPEALS), AFTE R EXAMINING THE MINUTES OF THE MEETING OF THE BOARD OF DIRECTORS DI D NOT ACCEPT THE CONTENTION OF THE ASSESSEE THAT NAGARJUNA OIL CORPO RATION LTD. IS A SUBSIDIARY OF THE ASSESSEE. THE CIT(A) OBSERVED THAT THE MINU TES OF THE MEETING OF THE BOARD OF DIRECTORS CLEARLY SUGGESTED THAT IT IS A T OTALLY SEPARATE COMPANY. THE CIT(A) ON EXAMINING ANOTHER MINUTES OF THE MEE TING OF THE BOARD OF DIRECTORS FOUND THE SUBMISSION OF THE ASSESSEE TO THE EFFECT THAT IT HAS ENTERED INTO THE OIL REFINERY PROJECT AS A MEASURE OF BACKWARD INTEGRATION AND DUE TO AVAILABILITY OF THE BYE-PRODUCT (NAPHTHA) FO R ITS EXISTING FERTILIZER PLANT TO BE NOT CORRECT. FROM THE MINUTES OF THE MEETING , THE BASIC OBJECTIVE FOR ENTERING INTO THE OIL REFINERY PROJECT WAS FOUND TO BE FOR HAVING PRESENCE IN CORE SECTOR AREAS. THE CIT(A) OBSERVED THAT IT IS ONLY A MATTER OF COINCIDENCE THAT NAPHTHA AN USUAL BYE-PRODUCT OF OIL REFINERY, MAY BE AVAILABLE AS A RAW- MATERIAL FOR USER BY THE ASSESSEE IN ITS FERTILIZER PLANT. THE CIT(A) FURTHER OBSERVED THAT THE CONTENTION OF THE ASSESSEE ALSO M AY NOT BE TENABLE CONSIDERING THE FACT THAT NAPHTHA WAS SUPPLIED BY H INDUSTAN PETORLEUM CORPORATION LTD. FROM ITS KAKINADA TERMINAL THROUGH PIPELINE. THE CIT(A) WAS OF THE VIEW THAT THESE CIRCUMSTANCES DO NOT SUG GEST THAT THERE WAS IMMEDIATE BUSINESS PURPOSE OR EXPEDIENCY IN MAKING SUCH INVESTMENT IN SHARES OF NAGARJUNA OIL CORPORATION LTD. THE CIT( A), WHILE DEALING WITH THE CONTENTION OF THE ASSESSEE THAT THE INVESTMENT WAS MADE OUT OF INTERNAL ACCRUALS, OBSERVED THAT AS AT 31.3.2003 THE OUTSTAN DING LOANS FROM BANKS AND FINANCIAL INSTITUTIONS STOOD AT RS.1700 CRORES. THE BALANCE SHEET FILED ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 14 WITH THE RETURN FOR ASSESSMENT YEAR 2004-05 ALSO RE FLECTED HUGE OUTSTANDING LOANS FROM BANKS AND FINANCIAL INSTITUTIONS. IN VI EW OF SUCH HUGE OUTSTANDING LOAN LIABILITY, THE ASSESSEES CONTENTION THAT THE INVESTMENT IN SHARES WAS MADE OUT OF THE PROFITS OF THE COMPANY WAS NOT ACCE PTABLE TO THE CIT(A). THE CIT(A) FURTHER OBSERVED THAT THE ASSESSEE HAS A LSO NOT ESTABLISHED THE FACT THAT AT THE TIME OF ADVANCING THE AMOUNT TOWA RDS INVESTMENT IN SHARES, IT WAS HAVING SUFFICIENT NON-INTEREST BEARING OWN F UNDS. THE CIT(A) RELYING UPON A DECISION OF INCOME-TAX APPELLATE TRIBUNAL MU MBAI BENCH IN THE CASE OF SANGHVI SWISS REFILLS V/S. ITO(85 ITD 59) HELD T HAT THE PRIMARY BURDEN IS ON THE ASSESSEE TO PROVE THAT ON THE DATES WHEN INT EREST FREE LOAN WAS GIVEN, THERE WAS SUFFICIENT NON-INTEREST BEARING FUNDS WAS AVAILABLE WITH IT, TO ADVANCE MONEY TO ITS SISTER CONCERN WITHOUT CHARGIN G INTEREST. THE CIT(A), TAKING NOTE OF THE OBSERVATIONS OF THE ASSESSING OF FICER THAT THE CHEQUES FOR INVESTING IN THE SHARES OF NAGARJUNA OIL CORPORATIO N LTD. WERE ISSUED FROM THE OVERDRAFT ACCOUNT OF THE ASSESSEE MAINTAINED WI TH THE STATE BANK OF INDIA, CAME TO A CONCLUSION THAT THE BORROWED FUNDS HAVE BEEN UTILISED BY THE ASSESSEE FOR INVESTMENT IN THE SHARES OF NAGARJ UNA OIL CORPORATION LTD. THE CIT(A) RELYING UPON THE DECISION OF THE HONBLE PUNJAB AND HARYANA HIGH COURT IN CIT V/S. ABHISHEK INDUSTRIES LTD. (286 ITR 1), HELD THAT SINCE THERE WAS NO BUSINESS PURPOSE/COMMERCIAL EXPEDIENCY IN TH E SHARES OF M/S. NAGARJUNA OIL CORPORATION LTD., INTEREST ATTRIBUTAB LE TO SUCH INTEREST-FREE INVESTMENT HAS TO BE DISALLOWED. THE CIT(A) FURTHER HELD THAT ANY INVESTMENT MADE BY THE ASSESSEE ALWAYS INVOLVES COST. HOWEVER , IF SUCH INVESTMENT DOES NOT BRING IN TAXABLE INCOME, THE COST INVOLVED IN SUCH INVESTMENT IS NOT ALLOWABLE AS A DEDUCTION IN VIEW OF S.14A OF THE AC T. SINCE THE DIVIDEND THAT WOULD BE EARNED/ACCRUING ON THE SHARES OF M/S. NAGA RJUNA OIL CORPORATION LTD. IS EXEMPT FROM TAX, PROPORTIONATE INTEREST ATT RIBUTABLE TO THE INVESTMENT ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 15 MADE IN SHARES HAS TO BE DISALLOWED UNDER S.14A OF THE ACT. THE CIT(A) ACCORDINGLY SUSTAINED THE ADDITION OF RS.,2,80,65,0 00. 19. AGGRIEVED BY THE ABOVE ORDER OF THE CIT(A), AS SESSEE PREFERRED PRESENT APPEAL ON THIS ISSUE. 20. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE, REITERATING THE CONTENTIONS RAISED BEFORE THE CIT(A ), SUBMITTED THAT NO NEW LOANS WERE TAKEN BY THE ASSESSEE DURING THE RELEVAN T PREVIOUS YEAR. THE SHARE APPLICATION MONEYS WERE ALSO INVESTED IN EARL IER YEAR AND THEREFORE, NO DISALLOWANCE COULD BE MADE DURING THE YEAR UNDER AP PEAL. HE REFERRED IN THIS CONTEXT TO PAGE 31 OF THE PAPER-BOOK, WHEREAT SCHED ULE 3 TO THE BALANCE SHEET HAS BEEN FURNISHED. REFERRING TO THE NOTE ON PAGE 32 OF THE PAPER- BOOK, HE SUBMITTED THAT THE SHARES WERE ALSO PLEDGE D WITH BANKS AND FINANCIAL INSTITUTIONS, WHICH PROVE THE FACT THAT T HE INVESTMENTS WERE FOR COMMERCIAL EXPEDIENCY. THE LEARNED AUTHORISED REP RESENTATIVE FOR THE ASSESSEE, REFERRING TO SCHEDULE 2 OF THE BALANCE SH EET AT PAGE 30 OF THE PAPER-BOOK, SUBMITTED THAT THE ASSESSEE WAS HAVING SUFFICIENT RESERVES AND SURPLUS TO INVEST IN NAGARJUNA OIL CORPORATION LTD. WITHOUT UTILISING THE BORROWED FUNDS. THE LEARNED AUTHORISED REPRESENTA TIVE FOR THE ASSESSEE SUBMITTED THAT SINCE THERE IS NO NEXUS BETWEEN THE BORROWED FUNDS AND THE INVESTMENTS, NO NOTIONAL DISALLOWANCE COULD BE MADE TOWARDS INTEREST ON INVESTMENTS MADE IN NAGARJUNA OIL CORPORATION LTD.. IN SUPPORT OF THIS CONTENTION, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE RELIED ON THE DECISION OF HONBLE BOBAY HIGH COURT IN THE CAS E OF CIT V/S. RELIANCE UTILITIES AND POWER LTD.(313 ITR 340) AND THE THIRD MEMBER DECISION OF THE BOMBAY BENCH OF THE TRIBUNAL IN THE CASE OF VISEN I NDUSTRIES LTD. V/S. ADDITIONAL. CIT(136 ITD 309)(TM) ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 16 21. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON TH E OTHER HAND, SUBMITTED THAT THE INVESTMENTS IN SHARES HAVE BEEN MADE TO EARN DIVIDEND INCOME WHICH IS EXEMPT UNDER THE INCOME-TAX ACT. HE NCE, DISALLOWANCE OF EXPENDITURE ATTRIBUTABLE TO EARNING OF SUCH INCOME HAS TO BE MADE UNDER S.14A OF THE ACT. THE LEARNED DEPARTMENTAL REPRESE NTATIVE SUBMITTED THAT BUSINESS CONSIDERATION OR COMMERCIAL EXPEDIENCY IS NOT AN ISSUE TO BE TAKEN INTO ACCOUNT IN THE CONTEXT OF DISALLOWANCE TO BE M ADE UNDER S.14A OF THE ACT. THE LEARNED DEPARTMENTAL REPRESENTATIVE IN SU PPORT OF HIS CONTENTIONS RELIED UPON THE FOLLOWING DECISIONS- (A) CIT V/S. ABHISHEKH INDUSTRIES (SUPRA) (B) CIT V/S. V.I. BABY & CO. (254 ITR 248) KER. (C) ACIT V/S. CENTURY TOWERS (312 ITR (AT) 161)- COCH. (D) DCIT V/S. M/S. MAHESWARI PLAZA RESORTS P. LTD. (ITA NO.778/HYD/2009 AND OTHERS, DATED 31.10.2011) 22. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED TH E MATERIALS ON RECORD. THERE IS NO DISPUTE TO THE FACT THAT THE A SSESSEE HAS INVESTED RS.18.71 CRORES IN THE SHARES OF M/S. NAGARJUNA OIL CORPORATION LTD. THE INTEREST ATTRIBUTABLE TO THE AFORESAID INVESTMENT H AS BEEN DISALLOWED UNDER S.14A OF THE ACT. IT IS THE CASE OF THE ASSESSEE T HAT THE INVESTMENT HAS BEEN MADE IN SHARES FROM NON-INTEREST BEARING FUNDS AND NOT OUT OF BORROWED FUNDS. THAT APART, SINCE THE INVESTMENT IN SHARE AP PLICATION MONEY WAS MADE IN AN EARLIER YEAR, NO DISALLOWANCE COULD BE MADE I N THE YEAR UNDER APPEAL. IT IS ALSO THE CASE OF THE ASSESSEE THAT THE INVEST MENTS HAVE BEEN MADE LOOKING TO THE BUSINESS EXPEDIENCY. HOWEVER, THESE ARGUMENTS MAY NOT BE ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 17 RELEVANT IN THE CONTEXT OF DISALLOWANCE MADE BY APP LYING THE PROVISIONS OF S.14A OF THE ACT, WHICH READ AS FOLLOWS- 14A (1) FOR THE PURPOSES OF COMPUTING THE TOTAL IN COME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT O F EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. SO, TO WARRANT DISALLOWANCE IN TERMS S.14A OF THE ACT, THERE HAS TO BE IN THE FIRST PLACE, CERTAIN INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOM E AND CERTAIN EXPENDITURE SHOULD BE FOUND BY THE REVENUE AUTHORITIES, TO HAVE BEEN INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME . IN THE PRESENT CASE, WHAT IS DISALLOWED BY INVOKING THE PROVISIONS OF S. 14A OF THE ACT, IS THE INTEREST ATTRIBUTABLE TO THE INVESTMENTS MADE IN SH ARES BY THE ASSESSEE IN M/S. NAGARJUNA OIL CORPORATION LTD. AND THE REASON FOR THE DISALLOWANCE OF SUCH INTEREST IS THAT THE RETURN IN THE FORM OF DIV IDEND, EARNED IF ANY, FROM SUCH INVESTMENTS WOULD BE EXEMPT FROM TAX. THE REAS ONING GIVEN FOR THE IMPUGNED DISALLOWANCE IS NOT CORRECT, SINCE WHAT IS LIABLE TO BE DISALLOWED IN TERMS OF S.14A IS ONLY THE EXPENDITURE, IF ANY INCU RRED, BY THE ASSESSEE IN RELATION TO THE DIVIDENDS, IF ANY EARNED, BY THE AS SESSEE FROM SUCH INVESTMENTS IN M/S. NAGARJUNA OIL CORPORATION LTD. 23. WE ARE FORTIFIED IN THIS BEHALF BY THE CASE-LAW RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF MAHESWARI PLAZA AND RESORTS LTD. (SU PRA) HAS CONSIDERED THE DECISION OF THE HONBLE PUNJAB AND HARYANA HIGH COU RT IN THE CASE OF CIT V/S. HERO CYCLES LTD. (323 ITR 518), WHEREIN THE HONBLE HIGH COURT HELD AS FOLLOWS- ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 18 4. WHETHER, IN A GIVEN SITUATION, ANY EXPENDI TURE WAS INCURRED WHICH WAS TO BE DISALLOWED, IS A QUESTION OF FACT. THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITUR E IS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST TH E BUSINESS INCOME WHICH MAY NULLIFY THE MANDATE OF SECTION 14A, CANNOT BE A CCEPTED. DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITU RE HAS BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A CANNOT STAND. AS CAN BE SEEN FROM THE RATIO LAID DOWN IN THE AFOR ESAID DECISION, THE HONBLE HIGH COURT NEGATED THE CONTENTION OF THE REVENUE TH AT DIRECTLY OR INDIRECTLY SOME EXPENDITURE WAS ALWAYS INCURRED, WHICH MUST BE DISALLOWED UNDER S.14A OF THE ACT. THE HONBLE HIGH COURT HELD THAT DISALLOWANCE OF S.14A REQUIRED FINDING OF INCURRING OF EXPENDITURE AND WH ERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME, NO EXPENDITURE WAS INCURRE D, NO DISALLOWANCE COULD BE MADE UNDER S.14A. THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF MAHESWARI PLAZA AND RESORTS LTD. (SUPRA), F OLLOWED THE SAID DECISION OF THE HONBLE PUNJAB AND HARYANA HIGH COURT AND AL SO THE VIEW TAKEN BY THE TRIBUNAL IN THE CASE OF ACIT V/S. SUN INVESTMENTS ( 8 ITR(TRIB) 33), AND DIRECTED THE ASSESSING OFFICER TO RE-EXAMINE THE MA TTER. 24. FROM THE ORDERS OF THE LOWER AUTHORITIES, IT IS NOT CLEAR AS TO WHETHER ANY EXEMPTED INCOME HAS BEEN EARNED BY THE ASSESSEE DURING THE YEAR UNDER APPEAL, ON THE INVESTMENT MADE IN SHARES OF M/S. NAGARJUNA OIL CORPORATION LTD. AND WHETHER THE ASSESSEE HAS INCUR RED ANY EXPENDITURE FOR EARNING SUCH DIVIDEND INCOME. IT IS ONLY SUCH EXPEN DITURE WHICH THE ASSESSEE MUST HAVE INCURRED FOR EARNING DIVIDEND INCOME FROM M/S. NAGARJUNA OIL CORPORATION LTD., WHICH CAN BE DISALLOWED IN TERMS OF S.14A OF THE ACT, AND NOT ANY NOTIONAL INTEREST RELATABLE TO THE INVESTME NTS MADE IN THE SHARES OF M/S. NAGRJUNA OIL CORPORATION LTD. WE THEREFORE, A RE OF THE VIEW THAT THE AFORESAID ASPECT OF THE MATTER NEEDS TO BE VERIFIED BY THE ASSESSING OFFICER BEFORE MAKING ANY DISALLOWANCE UNDER S.14A OF THE A CT. WE ACCORDINGLY SET ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 19 ASIDE THE IMPUGNED ORDER OF THE CIT(A) ON THIS ISSU E, AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR A DECISION AFRESH ON THIS ISSUE IN ACCORDANCE WITH LAW AND AFTER GIVING REASONABLE OPP ORTUNITY OF HEARING TO THE ASSESSEE. 25. IN GROUNDS NO.7 AND 8, THE ASSESSEE IS AGGRIE VED BY THE DISALLOWANCE OF INTEREST AMOUNTING TO RS.29,95,000, BEING ATTRIBUTABLE TOWARDS INTEREST FREE ADVANCES. 26. BRIEFLY, THE FACTS IN RELATION TO THIS ISSUE A RE THAT IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER FOUND THAT DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAD GIVEN ADVANCES AMOU NTING TO RS.199.69 LAKHS TO M/S. NAGARJUNA OIL CORPORATION LTD. WITHOU T CHARGING ANY INTEREST. THE ASSESSING OFFICER THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY PROPORTIONATE INTEREST THEREON SHOULD NOT BE DISALL OWED OUT OF THE INTEREST PAID BY IT TO THE FINANCIAL INSTITUTIONS. THE AS SESSEE IN ITS REPLY SUBMITTED THAT THE LOAN WAS GIVEN OUT OF ITS INTERNAL ACCRUAL S AND NOT FROM BORROWED FUNDS. THE ASSESSING OFFICER HOWEVER, DID NOT ACCE PT SUCH PLEA OF THE ASSESSEE BY NOTING THAT THE ASSESSEE DID NOT HAVE A NY RESERVES OR BROUGHT FORWARD BALANCES TO ADVANCE SUCH LOAN. THE ASSESSI NG OFFICER, OPINING THAT THE ASSESSEE WAS HEAVILY INDEBTED TO FINANCIAL INST ITUTIONS, THE INTEREST FREE ADVANCE TO M/S. NAGARJUNA OIL CORPORATION LTD. HAS TO BE TREATED AS HAVING BEEN GIVEN OUT OF BORROWED FUNDS, AND HENCE THE INT EREST ATTRIBUTABLE TO THAT AMOUNT HAS TO BE DISALLOWED. HE ACCORDINGLY DISALL OWED AN AMOUNT OF RS.29,95,000, BEING INTEREST WORKED OUT AT 15% ON R S.199.69 LAKHS. 27. THE ASSESSEE, BEING AGGRIEVED BY THE DISALLOWA NCE MADE AS ABOVE, CHALLENGED THE SAME BEFORE THE CIT(A). IN T HE COURSE OF HEARING OF THE APPEAL, THE ASSESSEE CONTENDED BEFORE THE CIT(A ) THAT THE ASSESSEE ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 20 BEING A HOLDING COMPANY OF M/S. NAGARJUNA OIL CORPO RATION LTD. HAD TO SUBSCRIBE TO THE EXTENT OF 51% OF THE SHARE-HOLDING . HENCE, THE ADVANCES WOULD ULTIMATELY BE CONVERTED INTO EQUITY SHARES ON ALLOTMENT. IT WAS SUBMITTED BY THE ASSESSEE THAT THE INVESTMENT AND T HE ADVANCES ARE LIKELY TO YIELD RESULTS, WHICH WOULD BE RECEIVED BY THE ASSES SEE IN DUE COURSE, OVER A PERIOD OF TIME. THE INVESTMENT HAS BEEN MADE AT TH E INITIAL STAGE, LOOKING AT THE FUTURE PROSPECTS OF DERIVING BENEFIT THEREFROM. IT WAS FURTHER STATED THAT THE INTEREST FREE ADVANCE GIVEN TO M/S. NAGARJUNA O IL CORPORATION LTD. WAS MADE OUT OF THE INTERNAL ACCRUALS AND HAS NOT BEEN FUNDED BY ANY OF THE TERM LOANS OUTSTANDING AT THE END OF THE RELEVANT PREVIO US YEAR. IT WAS SUBMITTED THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN TR EATING THE ADVANCE AS HAVING BEEN GIVEN OUT OF THE BORROWED FUNDS AND DISALLOWIN G PROPORTIONATE INTEREST. IT WAS FURTHER SUBMITTED THAT THE ADVANCE TO M/S. N AGARJUNA OIL CORPORATION LTD. BEING ON ACCOUNT OF BUSINESS CONSIDERATION, NO DISALLOWANCE COULD HAVE BEEN MADE IN VIEW OF THE RATIO DECIDED IN THE CASE OF S.A. BUILDERS V/S. CIT (288 ITR 1). 28. THE CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, WAS OF THE VIEW THAT THERE WAS NO IMMEDIATE BUSINES S PURPOSE OR COMMERCIAL EXPEDIENCY AT THE TIME OF ADVANCING THE AMOUNTS IN QUESTION TO M/S. NAGARJUNA OIL CORPORATION LTD. THE CIT(A) FURTHER HELD THAT THOUGH THE ASSESSEE CONTENDED THAT THE INTEREST FREE ADVANCES WERE GIVEN OUT OF INTERNAL ACCRUALS AND NOT OUT OF BORROWED FUNDS, THERE IS NO MERIT IN THE SAID CONTENTION IN VIEW OF THE RATIO OF THE DECISION OF THE HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT V/S. ABHISHEK INDUSTRIES LTD. (286 ITR 1). WHEREIN IT WAS HELD THAT WHEN INTEREST FREE LOA N IS ADVANCED TO SISTER CONCERN, WHILE PAYMENTS ARE OUTSTANDING ON THE BORR OWINGS MADE BY THE COMPANY, INTEREST TO THE EXTENT RELATING TO THE SUM ADVANCED INTEREST FREE ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 21 HAS TO BE DISALLOWED. ON THE AFORESAID CONCLUSION , THE CIT(A) SUSTAINED THE DISALLOWANCE OF RS.29,95,000. 29. AGGRIEVED BY THE AFORESAID ORDER OF THE CIT(A) , ASSESSEE IS IN APPEAL BEFORE US ON THIS ISSUE. 30. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE REITERATING THE CONTENTIONS URGED BEFORE THE LOWER AUTHORITIES AND IN RELATION TO GROUND NOS.5 AND 6 OF THIS APPEAL ON THE ASPECT OF COMMERCIAL EXPEDIENCY, SUBMITTED THAT SINCE THE INTEREST FREE ADVANCES WERE OUT OF THE INTERNAL ACCRUALS AND HAD NO CONNECTION WITH THE BO RROWED FUNDS, THE DISALLOWANCE MADE IS NOT JUSTIFIED. HE FURTHER CON TENDED THAT THE INVESTMENTS WERE ALSO MADE OUT OF COMMERCIAL EXPEDI ENCY AND HENCE NO DISALLOWANCE COULD BE MADE IN VIEW OF THE RATIO LAI D DOWN BY THE APEX COURT IN THE CASE OF S.A. BUILDERS (SUPRA). THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSI NG OFFICER HAVING FAILED TO ESTABLISH THE NEXUS BETWEEN THE BORROWED FUNDS AND THE INTEREST FREE ADVANCES, WAS NOT CORRECT IN PRESUMING THAT THE INT EREST ADVANCES WERE MADE OUT OF THE BORROWED FUNDS. 31. THE LEARNED DEPARTMENTAL REPRESENTATIVE, REITE RATING THE CONTENTIONS URGED BEFORE US IN RELATION TO GROUND N OS.5 AND 6 OF THIS APPEAL ON THE ASPECT OF COMMERCIAL EXPEDIENCY,, STRONGLY S UPPORTED THE ORDERS OF THE LOWER AUTHORITIES. HE SUBMITTED THAT SINCE IN TEREST FREE ADVANCES WERE MADE TO A SISTER CONCERN, WHEN THE ASSESSEE HAS HUG E INTEREST-BEARING LOAN LIABILITY, IT CANNOT BE SAID THAT THE ADVANCES WERE FOR COMMERCIAL EXPEDIENCY. RELYING UPON THE DECISION OF PUNJAB AND HARYANA HIG H COURT IN THE CASE OF ABHISHEK INDUSTRIES (SUPRA) AND OF THE KERALA HIGH COURT IN THE CASE OF V.I. ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 22 BABY AND CO.(254 ITR 248), THE LEARNED DEPARTMENTA L REPRESENTATIVE SUBMITTED THAT PROPORTIONATE HAS BEEN RIGHTLY DISAL LOWED IN THIS CASE. 32. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO APPLIED OUR MIND TO THE DECISIONS CITED AT THE BAR BY EITHER PARTY. THE DISALLOWANCE OF THE I NTEREST OF RS.29,95,000 HAS BEEN MADE BY THE REVENUE AUTHORITIES ON THE GROUND THAT THE ASSESSEE HAS MADE INTEREST-FREE ADVANCE OF RS.199.69 LAKHS TO I TS SISTER CONCERN, M/S. NAGRJUNA OIL CORPORATION OUT OF ITS BORROWED FUNDS ONLY, SINCE IT DID NOT HAVE ENOUGH RESERVES OR SURPLUS TO MAKE SUCH INTEREST FR EE ADVANCE. THAT APART, WHEN THE ASSESSEE ITSELF IS HAVING HUGE INTEREST-BE ARING DEBT LIABILITY AS AT THE END OF THE PREVIOUS YEAR, PROPORTIONATE INTERES T ATTRIBUTABLE TO INTEREST FREE ADVANCE MADE TO THE SISTER CONCERN HAS TO BE D ISALLOWED. THE CONTENTION OF THE ASSESSEE AGAINST THE IMPUGNED DISALLOWANCE I S THAT THE INTEREST FREE ADVANCE HAS BEEN MADE OUT OF ITS INTERNAL ACCRUALS, KEEPING IN VIEW THE COMMERCIAL EXPEDIENCY. IT IS ALSO THE CONTENTION OF THE ASSESSEE THAT WITHOUT ESTABLISHING NEXUS BETWEEN THE BORROWED FUNDS AND T HE INTEREST FREE ADVANCE MADE, THE REVENUE AUTHORITIES ARE NOT JUSTIFIED IN MAKING THE IMPUGNED DISALLOWANCE. 33. IN THIS CONTEXT, IT IS PERTINENT TO NOTE THAT THE COMMERCIAL EXPEDIENCY HAS TO BE EXAMINED ON THE FACTS AND CIRC UMSTANCES OF EACH CASE, AND OVERWHELMING NATURE OF THE COMMERCIAL EXPEDIENC Y INVOLVED TO JUSTIFY THE EXPENDITURE IN QUESTION. IT HAS TO BE BORNE IN MIND THAT IF THERE IS MUTUAL BENEFIT IN A TRANSACTION OR MUTUALITY OF TRA NSACTIONS BETWEEN THE ASSESSEE AND ITS SISTER CONCERN, THEN ONLY THE EXPE NDITURE CAN BE ALLOWED ON GROUNDS OF COMMERCIAL EXPEDIENCY. THEN, AGAIN THE MANDATE OF COMMERCIAL EXPEDIENCY HAS TO BE WEIGHED, TAKING INTO ACCOUNT T HE FINANCIAL WELL BEING OF ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 23 THE ASSESSEE AT THE GIVEN TIME. EXPLAINING THE COMM ERCIAL EXPEDIENCY INVOLVED IN THE TRANSACTION OF INTEREST FREE LENDIN G DONE BY THE ASSESSEE IN THE PRESENT CASE, IT IS SUBMITTED THAT THAT THOUGH THE SISTER CONCERN IS ONLY IN THE INITIAL STAGE OF BEING ESTABLISHED, THE INTERES T FREE ADVANCE HAS BEEN MADE, LOOKING TO THE FUTURE BENEFITS THAT THE ASSES SEE COULD DERIVE FROM M/S. NAGARJUNA OIL CORPORATION LTD., SINCE A BYE-PRODUCT (NAPHTHA) OF THE OIL REFINERY, IS THE RAW MATERIAL FOR THE EXISTING FERT ILIZER UNIT AT KAKINADA, APART FROM THE FACT THAT SUCH INTEREST-FREE ADVANCE WOULD BE CONVERTED INTO SHARES OF THAT COMPANY IN DUE COURSE. THIS JUSTIFICATION FOR THE EXPENDITURE, INTEREST, INCURRED ON THE GROUNDS OF THE COMMERCIAL EXPEDIENCY HAS TO BE EXAMINED, LOOKING TO THE OVERWHELMING NATURE OF THE COMMERCIAL EXPEDIENCY VIS--VIS THE FINANCIAL POSITION OF THE ASSESSEE. IN THE FACTS OF THE PRESENT CASE, THOUGH IT IS TRUE THAT THERE MUST BE NEXUS BE TWEEN THE BORROWED FUNDS AND THE INTEREST FREE ADVANCE MADE, AT THE SAME TIM E, IT CANNOT BE IGNORED THAT THE ASSESSEE IS INCURRING HUGE INTEREST BURDEN ON ACCOUNT OF HEAVY INTEREST-BEARING DEBT LIABILITY AS AT THE END OF TH E YEAR. HAD THE ASSESSEE NOT MADE THE INTEREST-FREE ADVANCE IN QUESTION TO THE S ISTER CONCERN, THEN THE DEBT LIABILITY WOULD HAVE BEEN REDUCED TO THAT EXTE NT, WHICH, IN TURN, WOULD HAVE RESULTED IN INCURRING LESSER AMOUNT OF INTERES T OR THE ASSESSEE COULD AT LEAST HAVE INVESTED IT IN SUCH A MANNER WHICH WOULD HAVE GENERATED INCOME. IN THE FACTS OF THE PRESENT CASE, CONSIDERING THE P RECARIOUS FINANCIAL POSITION OF THE ASSESSEE, WHICH HAS HUGE INTEREST-BEARING DE BT LIABILITIES, IT CANNOT BE SAID THAT COMMERCIAL EXPEDIENCY, IN THE FORM OF REA PING BENEFITS IN THE FORM OF BYE-PRODUCT WHICH IS ITS RAW-MATERIAL, BESIDES S HARES ON CONVERSION OF THE ADVANCE AMOUNT INTO SHARES, INVOLVED CANNOT BE SAID TO BE SO OVERWHELMING, AS TO JUSTIFY INTEREST-FREE LENDING. WE ARE SUPPO RTED IN THIS BEHALF, BY THE DECISIONS OF THE HONBLE PUNJAB AND HARYANA HIGH CO URT IN THE CASE OF ABHISHEK INDUSTRIES (SUPRA) AND OF THE HONBLE KERA LA HIGH COURT IN THE CASE ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 24 OF V.I.BABY (SUPRA). EVEN IN THE CASE OF S.A.BUILD ERS LTD. (SUPRA), THE HONBLE SUPREME COURT HELD THAT THERE HAS TO BE NEX US BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS. THERE MUST BE SOME BENEFIT ACCRUING TO THE ASSESSEE AS A RESULT OF DIVERSION O F THE FUNDS TO ITS SISTER CONCERN. IN THE CASE BEFORE US, THE ASSESSEE HAS NOT PROVED AS TO WHAT IMMEDIATE BENEFIT THAT WILL ACCRUE TO THE ASSESSEE, AS A RESULT OF INTEREST-FREE ADVANCE MADE TO ITS SISTER CONCERN, CONSIDERING THE FACT THAT THE ASSESSEE HAS HUGE INTEREST-BEARING DEBT LIABILITY. THE DECIS IONS RELIED UPON BY THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE , VIZ. OF THE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER L TD.(SUPRA) AND OF THE THIRD MEMBER OF THE BOMBAY BENCH OF THE TRIBUNAL IN THE C ASE OF VISEN INDUSTRIES LTD. (SUPRA) HAS NO APPLICATION TO THE FACTS OF THE PRESENT CASE, INASMUCH AS IN THOSE CASE THE FIRST APPELLATE AUTHORITY AS WELL AS THE TRIBUNAL HAVE RENDERED A FINDING OF FACT THAT THE INTEREST FREE L ENDING WERE MADE OUT OF THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. IN THIS VIEW OF THE MATTER, WE ARE OF THE CONSIDERED OPINION THAT THE DISALLOWA NCE OF PROPORTIONATE INTEREST ATTRIBUTABLE TO THE INTEREST-FREE ADVANCE MADE BY THE ASSESSEE TO ITS SISTER CONCERN NAGARJUNA OIL CORPORATION LTD., MADE BY THE ASSESSING OFFICER IS IN ORDER AND THE CIT(A) IS JUSTIFIED IN CONFIRMI NG THE SAME. WE ACCORDINGLY, UPHOLD THE IMPUGNED ORDER OF THE CIT(A), AND REJECT THE GROUNDS OF THE ASSESSEE ON THIS ISSUE. 34. IN GROUNDS NO.9 AND 10, THE ASSESSEES GRIEVAN CE IS AGAINST DISALLOWANCE OF RS.35,15,55,000 ON ACCOUNT OF INTER EST ATTRIBUTABLE TO INTEREST-FREE ADVANCES. 35. BRIEFLY THE FACTS OF THE CASE IN RELATION TO T HESE GROUNDS ARE THAT ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 25 IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESS ING OFFICER NOTICED THAT AS PER THE DETAILS OF LOANS AND ADVANCES SHOWN AT R S.448.16 CRORES, AN AMOUNT OF RS.234.37 CRORES PERTAIN TO LOANS AND ADV ANCES TO OTHERS. THE ASSESSING OFFICER, THEREFORE, IN HIS LETTER DATED 1 5.12.2006 CALLED FOR FURNISHING THE NAMES AND ADDRESSES OF THE PERSONS T O WHOM SUCH ADVANCES WERE MADE. SINCE THE ASSESSEE DID NOT SUBMIT ANY SPECIFIC REPLY ON THE QUERY RAISED BY THE ASSESSING OFFICER, THE ASSESSIN G OFFICER HELD THAT THE AMOUNT OF RS.234.37 CRORES WAS ADVANCED BY THE ASSE SSEE TO OTHERS WITHOUT ANY BUSINESS PURPOSE. THE ASSESSING OFFICER WAS OF THE VIEW THAT WHEN THE ASSESSEE WAS PAYING INTEREST ON BORROWED FUNDS TO F INANCIAL INSTITUTIONS AND BANKS, THERE WAS NO JUSTIFICATION ON HIS PART TO AD VANCE SUCH A HUGE AMOUNT WITHOUT CHARGING ANY INTEREST. THE ASSESSING OFFICE R THEREFORE, CALCULATED THE INTEREST AT THE RATE OF 15% ON THE ADVANCE OF RS.23 4.37 CRORES, AND WORKED OUT THE INTEREST ATTRIBUTABLE TO SUCH ADVANCES AT R S.35,15,55,000 AND DISALLOWED THE SAME. THE ASSESSING OFFICER FOR THI S PURPOSE RELIED UPON THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CA SE OF CIT V/.S. INDIAN EXPRESS (MADURAI) LTD. (128 TAXMAN 514). 36. THE ASSESSEE CHALLENGED THE ABOVE DISALLOWANCE IN APPEAL BEFORE THE CIT(A). IN THE COURSE OF HEARING BEFORE THE CI T(A) THE ASSESSEE FURNISHED THE DETAILS WITH REGARD TO THE INTEREST F REE ADVANCE OF RS.234.37 CRORES, WHICH IS AS FOLLOWS- (1) NAGARJUNA FINANCE LTD. RS.146.37 CRORES (2) VIPL RS. 80.92 CRORES (3) OTHERS RS. 7.08 CRORES ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 26 EXPLAINING THE ADVANCE MADE TO M/S. NAGARUNJA FINAN CE LTD., THE ASSESSEE SUBMITTED THAT IT WAS ONE OF THE GROUP ENTITIES STA RTED SEVERAL YEARS AGO. HOWEVER, THE ASSESSEE, M/S. NAGARJUNA FERTILISERS & CHEMICALS LTD.(NFCL) WAS TAKEN OVER FROM THE STATE GOVERNMENT BY THE NAG ARJUNA GROUP. AT THAT TIME, M/S. NAGARJUNA FINANCE LTD. WAS ALREADY EXIST ING AS A PART OF NAGARJUNA GROUP. THE ACCUMULATED BALANCE IN M/S. N AGARJUNA FINANCE LTD. REPRESENT THE BANK LOAN SETTLED BY NFCL ON BEHALF O F M/S. NAGARJUNA FINANCE LTD., DUE TO PRESSURES FROM THE BANKERS AND THE LIA BILITY TO THE PUBLIC DEPOSITOR HOLDERS. IT WAS SUBMITTED THAT THE ASSES SEE HAS NOT FUNDED ANY BALANCE OR MONEY DURING THE RELEVANT PREVIOUS YEAR. THE AMOUNT LYING WAS MET OUT OF THE CASH ACCRUALS IN RESPECTIVE EARLIER YEARS. IT WAS FURTHER STATED BY THE ASSESSEE THAT THE RESERVES OF THE NFCL HAS R EACHED A PEAK OF RS.841.36 CRORES DURING THE YEAR 2000-01. THE ASS ESSEE SUBMITTED THAT THE AMOUNT FUNDED TO M/S. NAGARJUNA FINANCE LTD. WAS OU T OF THE INTERNAL CASH ACCRUALS FROM ITS BUSINESS OPERATIONS, AND HENCE TH E ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING PROPORTIONATE DISALLOWANCE OF INTEREST. SO FAR AS INTEREST FREE ADVANCE TO VIPL IS CONCERNED, IT WAS SUBMITTED BY THE ASSESSEE THAT THE AMOUNT OF RS.80.92 CRORES ADVANCED TO VIPL WAS TOWARDS PURCHASE OF PESTICIDES IN EARLIER SEASONS. THE AMOUNT WAS GIVEN AS AN ADVANCE FOR CONTINUING WITH THE PURCHASE OF PESTICIDES AND TO E NSURE CONTINUITY OF FUTURE SUPPLY. THE ASSESSEE STATED THAT THE ADVANCE WAS A BONA FIDE BUSINESS ADVANCE TO ENSURE THE SUPPLY OF PESTICIDES DEALT BY THE ASSESSEE COMPANY. THEREFORE, DISALLOWANCE OF INTEREST ATTRIBUTABLE TO SUCH ADVANCE IS NOT JUSTIFIED. 37. THE CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, WAS OF THE VIEW THAT THOUGH THE ASSESSEE HAS STATED THAT THE AMOUNT WAS NOT FUNDED DURING THE PREVIOUS YEAR AND WHATEVER ADVANC E WAS MADE WAS OUT OF ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 27 CASH ACCRUALS IN THE EARLIER YEAR, AND THE AMOUNT W AS PAID ON BEHALF OF THE M/S. NAGARJUNA FINANCE LTD. TO DIFFERENT BANKS TO F OR SETTLING BANK LOANS AND DEPOSITORS BALANCE, THE ASSESSEE HAS NOT EXPLAINED AS TO HOW SUCH ADVANCING OF FUNDS MADE TO M/S. NAGARJUNA FINANCE LTD. WAS FO R COMMERCIAL EXPEDIENCY. THE CIT(A) OBSERVED THAT THE ASSESSEE HAS NOT STATED AS TO HOW THE ASSESSEE WOULD BE BENEFITED FROM THE ADVANC ING OF THE SAID AMOUNT OF RS.146.37 CRORES TO M/S. NAGARJUNA FINANCE LTD. THE CIT(A) THEREFORE, RELYING UPON THE DECISION OF THE HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT V/S. ABHISHEKH INDUSTRIES (SUPRA) H ELD THAT WHEN THE ASSESSEE WAS HAVING SUBSTANTIAL BORROWED FUNDS FRO M BANKS AND FINANCIAL INSTITUTIONS AND IT WAS PAYING INTEREST ON THE SAME DURING THE PREVIOUS YEAR, THE INTEREST ATTRIBUTABLE TO THE INTEREST FREE ADVA NCE HAS TO BE DISALLOWED. WHILE DEALING WITH THE ADVANCE OF RS.80.92 CRORES T O VIPL, THE CIT(A) OBSERVING THAT THE ASSESSEE HAS NOT FILED ANY EVIDE NCE BEFORE HIM TO PROVE THE FACT THAT THE ADVANCE WAS GIVEN FOR PURCHASE OF PESTICIDES, HELD THAT THE ADVANCE AMOUNT WAS NOT FOR BUSINESS PURPOSES OF TH E ASSESSEE, AND HENCE INTEREST ATTRIBUTABLE TO SUCH ADVANCE NEEDS TO BE D ISALLOWED. SIMILARLY, IN THE CASE OF ADVANCES OF RS.7.08 CRORES TO OTHERS, T HE CIT(A) OBSERVED THAT IN THE ABSENCE OF ANY DETAILS FURNISHED BY THE ASSESSE E IN THIS REGARD, IT CANNOT BE SAID THAT THE INTEREST FREE ADVANCE TO DIFFEREN T PARTIES IS CONCERNED, IT IS FOR COMMERCIAL EXPEDIENCY. ON THE AFORESAID CONCLUS IONS, THE CIT(A) SUSTAINED THE ENTIRE DISALLOWANCE OF RS.35.15 CRORE S 38. BEING AGGRIEVED BY THE ORDER OF THE CIT(A) AS ABOVE, ASSESSEE IS IN APPEAL BEFORE US ON THIS ISSUE. 39. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE, REITERATING THE STAND TAKEN BEFORE THE CIT(A), SUBM ITTED THAT THE INTEREST-FREE ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 28 ADVANCE OF RS.146.37 CRORES TO M/S. NAGARJUNA FINAN CE LTD., A GROUP COMPANY WAS FOR THE PURPOSE OF BUSINESS, SINCE THE BANK LOAN AND DEPOSITORS LIABILITY HAD TO BE SETTLED DUE TO PRES SURE FROM THE BANKERS AND PUBLIC DEPOSIT-HOLDERS. THE LEARNED AUTHORISED REP RESENTATIVE FOR THE ASSESSEE FURTHER STATED THAT THE ADVANCE WAS NOT FR OM BORROWED FUND BUT FORM OUT OF INTERNAL ACCRUALS. SO FAR AS ADVANCE OF RS.80.92 CRORES TO VIPL LTD., THE LEARNED AUTHORISED REPRESENTATIVE FOR TH E ASSESSEE SUBMITTED THAT IT REPRESENTED THE ADVANCE PAID TOWARDS PURCHASE OF PESTICIDES IN EARLIER SEASONS. SINCE IT WAS FOR THE PURPOSE OF ENSURING CONTINUITY OF SUPPLY OF PESTICIDES, IT CANNOT BE HELD THAT THE SAID ADVANCE HAS NO NEXUS WITH THE BUSINESS OF THE ASSESSEE. INSOFAR AS THE ADVANCE O F RS.7.082 CRORES TO OTHERS ARE CONCERNED, THE LEARNED AUTHORISED REPRES ENTATIVE FOR THE ASSESSEE INVITING OUR ATTENTION TO PAGE 57 OF THE PAPER BOOK SUBMITTED THAT THIS ADVANCE WAS ALSO FOR THE PURPOSE OF BUSINESS. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD ENOUGH RESERVES AND SURPLUS AVAILABLE WITH IT TO MAKE THE INTEREST FREE ADVANCES WITHOUT TOUCHING THE BORROWED FUNDS. 40. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES AND S UBMITTED THAT THERE BEING NO BUSINESS CONNECTION OR COMMERCIAL EXPEDIENCY, ES TABLISHED BY THE ASSESSEE, THE DISALLOWANCE MADE BY THE ASSESSING OF FICER IS IN ORDER. 41. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED TH E MATERIALS ON RECORD. SO FAR AS ADVANCE OF RS.146.37 CRORES TO M /S. NAGARJUNA FINANCE LTD. IS CONCERNED, THE ASSESSEE, APART FROM SUBMITT ING THAT IT IS ONE OF THE GROUP COMPANIES AND THE ADVANCE WAS FOR SETTLEMENT OF THE LIABILITIES OF THAT COMPANY TO THE BANKS, FINANCIAL INSTITUTIONS AND PU BLIC DEPOSIT HOLDERS, HAS ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 29 NOT STATED AS TO HOW THE ADVANCE WAS FOR THE PURPOS E OF ASSESSEES BUSINESS. IT WAS NOT DEMONSTRATED BEFORE US AS TO HOW AND IN WHAT MANNER THE ADVANCE MADE TO M/S. NAGARJUNA FINANCE LTD. HAS BEN EFITED THE ASSESSEE OR ENHANCED ITS PROFITABILITY. IN THE AFORESAID CIRCU MSTANCES, IT CANNOT BE HELD THAT THE INTEREST FREE ADVANCE WAS FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE PLEA OF THE ASSESSEE THAT THE ADVANCE WAS OUT OF INTERNAL ACCRUALS AND NOT FROM BORROWED MONEY IS ALSO NOT AC CEPTABLE FOR THE REASONS DISCUSSED IN THE CONTEXT OF GROUNDS NO.7 AND 8 HERE INABOVE. 42. SO FAR AS THE ADVANCE OF RS.80.92 CRORES TO V IPL IS CONCERNED, THE STAND OF THE ASSESSEE WAS THAT THIS INTEREST-FR EE ADVANCE WAS TOWARDS PURCHASE OF PESTICIDES, AND IT WAS TO ENSURE CONTIN UITY IN SUPPLY OF PESTICIDES IN ALL SEASONS. IT IS ONLY ON ACCOUNT OF ABSENCE OF ANY EVIDENCE FURNISHED BY THE ASSESSEE TO SUBSTANTIATE ITS CLAIM IN THIS BEHA LF, THAT THE DISALLOWANCE OF INTEREST CLAIMED BY THE ASSESSEE PROPORTIONATE TO T HIS AMOUNT WAS DISALLOWED. SIMILAR IS THE CASE OF THE INTEREST F REE ADVANCES OF RS.7.02 MADE BY THE ASSESSEE TO OTHERS, DETAILS OF WHICH ARE FUR NISHED BEFORE US AT PAGE 57 OF THE PAPER-BOOK, AS INTEREST ATTRIBUTABLE TO THES E ADVANCES WAS ALSO DISALLOWED ONLY ON ACCOUNT OF ABSENCE OF ANY EVIDEN CE FURNISHED BY THE ASSESSEE TO PROVE THE COMMERCIAL EXPEDIENCY THAT WA RRANTED THE SAID ADVANCES BEING MADE BY THE ASSESSEE. AS ALREADY NO TED ABOVE, THE COMMERCIAL EXPEDIENCY HAS TO BE EXAMINED ON THE FAC TS AND CIRCUMSTANCES OF EACH CASE, AND OVERWHELMING NATURE OF THE COMMERCIA L EXPEDIENCY INVOLVED TO JUSTIFY THE EXPENDITURE IN QUESTION. IT HAS TO BE BORNE IN MIND THAT IF THERE IS MUTUAL BENEFIT IN A TRANSACTION OR MUTUALITY OF TRANSACTIONS BETWEEN THE ASSESSEE AND THE CONCERNED PARTIES, THEN ONLY THE E XPENDITURE CAN BE ALLOWED ON GROUNDS OF COMMERCIAL EXPEDIENCY OR FOR THE PURPOSE OF ASSESSEES BUSINESS. WE FIND THAT NOTHING HAS BEEN MENTIONED EITHER IN THE ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 30 ASSESSMENT ORDER OR IN THE ORDER OF THE FIRST APPEL LATE AUTHORITY, TO INDICATE THE EXAMINATION OF THE MATTER FROM THAT ANGLE, VIZ. EXISTENCE OR OTHERWISE OF COMMERCIAL EXPEDIENCY OR BUSINESS CONNECTION, AS DI SCUSSED ABOVE, IN RELATION TO THE INTEREST-FREE ADVANCE MADE TO VIPL OR OTHERS. CONSIDERING TOTALITY OF FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND IT JUST AND PROPER TO SET ASIDE THE ISSUE OF DISALLOWANCE OF INTEREST REL ATABLE TO THE ADVANCE OF RS.80,92 CRORES TO VIPL AND RS.7.02 CRORES TO OTHER S, TO THE FILE OF THE ASSESSING OFFICER FOR RE-DECIDING THE SAME AFRESH, AFTER GIVING REASONABLE OPPORTUNITY TO THE ASSESSEE TO SUBSTANTIATE ITS CLA IM THAT THE SAID ADVANCES HAVE BEEN MADE FOR THE PURPOSE OF ASSESSEES BUSINE SS ONLY AND KEEPING IN MIND THE BUSINESS EXPEDIENCY. WE ACCORDINGLY SET A SIDE THE IMPUGNED ORDER OF THE CIT(A) ON THIS ISSUE TO THIS EXTENT, AND RES TORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR A FRESH DECISION IN ACCOR DANCE WITH LAW AND AFTER GIVING REASONABLE OPPORTUNITY TO THE ASSESSEE TO ES TABLISH ITS CASE. ASSESSEES GROUNDS ON THIS ISSUE ARE THUS PARTLY AL LOWED FOR STATISTICAL PURPOSES. 43. IN GROUNDS NO.13 AND 14, THE GRIEVANCE OF THE ASSESSEE IS AGAINST DISALLOWANCE OF R&D EXPENDITURE AMOUNTING T O RS.38,87,435 PAID TO M/S. NAGARJUNA AGRICULTURAL RESEARCH AND DEVELOPMEN T INSTITUTE. 44. WE HEARD BOTH SIDES AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND OTHER MATERIAL ON RECORD. IT IS SEE N FROM THE ORDERS OF THE LOWER AUTHORITIES THAT THE DISALLOWANCE OF THE ABOV E R&D EXPENDITURE WAS MADE ON THE GROUND THAT M/S. NAGARJUNA AGRICULTURAL RESEARCH AND DEVELOPMENT INSTITUTE TO WHOM THE AMOUNT IN QUESTIO N WAS PAID WAS NOT APPROVED BY THE CBDT. IT IS THE CONTENTION OF THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE BEFORE US THAT THE AFORESAID INSTITUTE WAS ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 31 APPROVED BY THE CBDT IN THE EARLIER YEARS AND THE A PPLICATION FOR RENEWAL OF APPROVAL FOR THE YEAR UNDER CONSIDERATION WAS PENDI NG WITH CBDT AND DURING THE PENDENCY OF THIS APPLICATION, ASSESSMENT HAS BE EN COMPLETED DISALLOWING THE EXPENDITURE CLAIMED ON R&D. THE LEARNED AUTHO RISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT IN THE MEANWHILE, THE C BDT HAS RENEWED THE APPROVAL GRANTED EARLIER. IN VIEW OF THIS SUBMISS ION OF THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE, WE DEEM IT PROPER TO SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES ON THIS ISSUE, AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR FRESH EXAMINA TION OF THIS ISSUE, DULY VERIFYING THE CONTENTION OF THE ASSESSEE THAT THE I NSTITUTE IN QUESTION TO WHICH PAYMENT HAS BEEN MADE BY THE ASSESSEE HAS BEE N APPROVED BY THE CBDT FOR THE YEAR UNDER CONSIDERATION. HE SHALL AC CORDINGLY REDECIDE THE ISSUE IN ACCORDANCE WITH LAW AND AFTER GIVING REASO NABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. WE DIRECT ACCORDINGLY. 45. IN THE RESULT, WHILE THE APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES, THE ASSESSEES APPEAL IS PART LY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON SD/- SD/- (CHANDRA POOJARI) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED/- 9 TH NOVEMBER, 2012 COPY FORWARDED TO: 1. M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD. , NAGRJUNA HILLS, PANJAGUTTA, HYDERABAD. ITA NO.438 & 479/HYD/2009 M/S. NAGARJUNA FERITILIZERS AND CHEMICALS LTD., HYDERABAD. 32 2. 3. 4. DY. COMMISSIONER OF INCOME-TAX CIRCLE 16(1), HYDER ABAD COMMISSIONER OF INCOME-TAX(APPEALS)-V, HYDERABAD COMMISSIONER OF INCOME-TAX IV HYDERABAD 5 DEPARTMENTAL REPRESENTATIVE, ITAT, HYDERABAD. B.V.S.