M/s.Abad Hotels (India) P. Ltd, Cochin V. The ACIT, Cochin

ITA 492/COCH/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4400 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2009-2010
• Appeal Filed On: 18-11-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: M V RUDRAN ADCIT
• Assessee Lawyers: RADHESH BHAT
• Keywords: Business income; Depreciation; Business expenditure; Earning of tax free income; Proportionate interest
• Section: 14A; 32

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI CHANDRA POOJARI , AM & GEORGE GEORGE K., JM I.T.A. NO.492/COCH/2016 ASSESSMENT YEAR : 2009 - 10 M/S. ABAD HOTELS (INDIA) P. LTD., M.G. ROAD, KOCHI-35. PAN:AACCA 2659L] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1(1), KOCHI. (ASSESSEE - APPELLANT) (REVENUE - R ESPONDENT) A SSESSEE BY SHRI RADHESH BHAT, CA REVENUE BY SHRI M.V. RUDRAN, ADCIT, SR. DR D ATE OF HEARING 19 / 0 3 /2018 DATE OF PRONOUNCEMENT 21 / 0 3 /2018 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER OF THE CIT(A)-I, KOCHI DATED 20/09/2016 AND PERTAINS TO THE ASSESSME NT YEAR 2009-10. 2. THE FIRST GROUND IS GROUND NO. 2 WHICH READS A S FOLLOWS: 2. THE LD. CIT(A) ERRED IN CONFIRMING THE ORDER OF THE ASSESSING OFFICER (AO) AND THEREBY RESTRICTING THE DEPRECIATION ON VEHICLE S USED BY THE APPELLANT IN THE BUSINESS OF RUNNING ON HIRE TO 15%, INSTEAD OF 30%. THE CIT(A) ERRED I.T.A. NO.492/C/2016 2 IN STATING THAT RUNNING VEHICLES ON HIRE FOR TRANSP ORTATION AND CATERING PURPOSES ARE INTEGRAL PART OF THE APPELLANTS CORE BUSINESS OF HOTELIERING AND RESTAURANT RUNNING. THE LEARNED CIT(A) ERRED IN NO T FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. DR. KR JAYACHANDRAN (212 ITR 637) RELIED UPON BY THE APPELLANT, WHEREIN THE HBLE HIGH COURT HAD HELD THAT IT IS NOT NECESSARY THAT RUNNING ON H IRE MUST BE THE MAIN BUSINESS OF THE APPELLANT; IT CAN BE INCIDENTAL TO THE MAIN BUSINESS ALSO. THE COURT ALSO HELD THAT HIGHER RATE OF DEPRECIATION SH OULD BE ALLOWED, EVEN IF THE RENT FROM HIRE OF VEHICLES ARE NOT CHARGED SEPA RATELY; WHEREAS IN THE CASE OF APPELLANT, THE RENT IS CHARGED SEPARATELY. 3. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE OW NS CERTAIN VEHICLES (I.E., MAHINDRA LOGAN AND OMNI CARGO AND TATA ACE PICKUP), WHICH ARE RUNNING ON HIRE. ON SUCH VEHICLES THE ASSESSEE CLAIMED HIGHER RATE OF 30% WHICH IS THE RATE OF DEPRECIATION APPLICABLE FOR VEHICLES RUNNING ON HIRE, FOR THE REASONS GIVEN BELOW: A) MAHINDRA LOGAN IS USED BY THE ASSESSEE TO TRANSP ORT TOURIST GUESTS STAYING IN THE HOTEL. THE INCOME DERIVED FROM THE ABOVE ACTIVITY IS GROUPED UNDER THE HEAD TRAVEL ASSISTANCE AND TAXI AND OFFERED TO TAX. B) SIMILARLY OMNI CARGO AND TATA ACE PICK UP VAN A RE USED IN CATERING BUSINESS OF THE ASSESSEE, THE INCOME OF WHICH IS IN CLUDED UNDER THE HEAD RESTAURANT INCOME AND OFFERED TO TAX. HOWEVER THE ASSESSING OFFICER RESTRICTED THE DEPREC IATION ON VEHICLES USED BY THE ASSESSEE IN THE BUSINESS OF RUNNING ON HIRE TO 15% INSTEAD OF 30% CLAIMED BY THE ASSESSEE AND THEREBY DISALLOWING THE DIFFERENTI AL DEPRECIATION OF RS.73,784/-. I.T.A. NO.492/C/2016 3 4. ON APPEAL, THE CIT(A) CONFIRMED THE DECISION OF THE ASSESSING OFFICER BY HOLDING THAT RUNNING OF VEHICLES ON HIRE IS INTEGRA L PART OF THE HOTEL BUSINESS OF THE ASSESSEE. THE CIT(A) HELD THAT SO AS TO CLAIM D EPRECIATION @30%, THE RUNNING OF VEHICLES ON HIRE MUST BE A SEPARATE INDE PENDENT BUSINESS AND HENCE THE JUDGMENT OF THE KERALA HIGH COURT IN THE CASE OF CIT VS. DR. KR JAYACHANDRAN (212 ITR 637) WAS NOT APPLICABLE TO TH E ASSESSEES CASE. 5. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT THE IN THE CASE OF DR. KR JAYACHANDRAN (SUPRA), THE HIGH COURT HAS HELD THAT THE CONDITION PRECEDENT TO GRANT OF DEPRECIATION IS THA T THE MOTOR CARE HAS BEEN USED IN THE BUSINESS OF PLYING ON HIRE FOR TOURISTS , WHICH IS A SEPARATE INDEPENDENT BUSINESS. IT WAS SUBMITTED THAT IT IS N OT NECESSARY THAT RUNNING ON HIRE MUST BE THE MAIN BUSINESS OF THE APPELLANT AND IT CAN BE INCIDENTAL TO THE MAIN BUSINESS ALSO. ACCORDING TO THE LD. AR, AS PE R THE SAID DECISION, THERE IS NO REQUIREMENT TO KEEP SEPARATE BOOKS TO CONSTITUTE TH E RUNNING OF VEHICLES ON HIRE TO BE A SEPARATE BUSINESS. THE COURT ALSO HELD THA T THERE IS NO BAR ON THE ASSESSEE TO COMBINE MANY BUSINESSES. THEREFORE, IT WAS CONTENDED THAT HIGHER RATE OF DEPRECIATION SHOULD BE ALLOWED, EVEN IF THE RENT FROM HIRE OF VEHICLES WAS NOT CHARGED SEPARATELY. IN THE CASE OF THE ASSESSE E, IT WAS SUBMITTED THAT THE INCOME FROM RUNNING OF VEHICLES ON HIRE IS ALSO OFF ERED AS BUSINESS INCOME AND HENCE THE ASSESSEE IS ELIGIBLE FOR HIGHER RATE OF D EPRECIATION. I.T.A. NO.492/C/2016 4 5.1 THE LD. AR RELIED ON THE DECISION OF THE DELHI BENCH OF ITAT IN THE CASE OF ACIT VS. HOTEL MARINA (112 ITD 159) WHEREIN IT WAS HELD THAT RENT FOR RUNNING THE VEHICLES TO TRANSPORTING TOURISTS WERE NOT EVEN CHARGED SEPARATELY. STILL, IT WAS SUBMITTED THAT THE TRIBUNAL HELD THAT THE ASSES SEE WAS ELIGIBLE FOR HIGHER DEPRECIATION, SINCE THERE WAS NOTHING ON RECORD TO SHOW THAT THE ASSESSEE HAS NOT USED THE VEHICLE FOR RUNNING IT ON HIRE. THE L D. AR SUBMITTED THAT THE IN THE CASE OF THE ASSESSEE THE RENT FOR RUNNING THE VEHIC LES WERE CHARGED SEPARATELY. THE LD. AR RELIED ON THE DECISION IN THE CASE OF CI T VS. LAKE PALACE HOTELS & MOTELS (P) LTD. (293 ITR 281)(RAJ.). THE LD. AR S UBMITTED THAT THE CIT(A) HAD IN ASSESSEES OWN CASE ACCEPTED THE ABOVE DECISIONS AND ALLOWED THE INCREASED DEPRECIATION CLAIMED BY THE ASSESSEE FOR THE AY 200 7-08 AND THE SAME SHOULD BE ALLOWED IN THE AY 2009-10 ALSO. HENCE, IT WAS SUBM ITTED THAT THE CLAIM OF INCREASED DEPRECIATION IS TO BE ALLOWED. 6. THE LD. DR RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. A SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF THE BALIAPATAM TILE WORKS L IMITED VS. DCIT IN ITA NO. 147/COCH/2014 DATED 04/07/2014 WHEREIN THE TRIBUNAL AFTER CONSIDERING THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF CIT VS. DR. KR JAYACHANDRAN (SUPRA) HELD AS UNDER: 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. IN THIS CASE, WE HAVE COME ACROSS A CO-ORDINATE BENCH DECISION IN TH E CASE OF MATHEW I.T.A. NO.492/C/2016 5 ABRAHAM VS. ACIT IN I.T.A. NO. 92/COCH/2013 VIDE OR DER DATED 16/08/2013 WHEREIN IT WAS HELD THAT THE ASSESSEE BEING NOT ENG AGED IN THE BUSINESS OF RUNNING THE VEHICLES ON HIRE, THE ASSESSEE IS NOT E NTITLED FOR A HIGHER RATE OF DEPRECIATION ON THE VEHICLES USED IN HIS OWN BUSINE SS. THE RELEVANT PORTION OF THE OBSERVATION IS EXTRACTED BELOW FOR THE SAKE OF CONVENIENCE: 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFU LLY PERUSED THE RECORD. WE NOTICE THAT THE LD. CIT(A) HAS EXAMINED THE WORK ORDERS ISSUED BY THE RAILWAYS AND CAME TO THE CONCLUSION THAT THE ASSESSEE IS NOT ENG AGED IN THE BUSINESS OF RUNNING OF VEHICLES ON HIRE AND HE NCE, NOT ENTITLED FOR A HIGHER RATE OF DEPRECIATION. FOR TH E SAKE OF CONVENIENCE, WE EXTRACT BELOW THE RELEVANT OBSERVAT IONS MADE BY THE LD. CIT(A): 7. I HAVE CAREFULLY, GONE THROUGH THE ASSESSMENT ORDER, THE GROUNDS OF APPEAL AND SUBMISSIONS FILED BY THE APPELLANT AND ALSO THE CASE LAWS RELIED UPON BY THE AUTHORISED REPRESENTATIVE FOR SEEKING RELIEF ON THE ISSUE. AFTER A CAREFUL CONSIDERATION OF THE SAME, MY VIEWS ON THE MATTER WITH REASONS THEREOF ARE AS GIVEN IN SUBSEQUENT PARAGRAPHS. 8. DURING THE COURSE OF APPEAL PROCEEDINGS, THE A SSESSEE HAS FILED COPIES OF A FEW WORK ORDERS ISSUED BY THE RAILWAYS WHERE THE NATURE OF WORK HAS BEEN MENTIONE D AS COLLECTION AND SUPPLY OF APPROVED QUALITY MACHINE CRUSHED TRACK BALLAST AS PER LATEST REVISED SPECIFICATION FROM OUTSIDE THE RAILWAY LIMIT AND STACKING FOR MEASUREMENTS AT BALLAST DEPOT IN WADAKANCHERI STATION YARD WITH ALL LEAD AND LIFTS, LOADING AND UNLOADING, CONVEYANCE FROM THE PLACE OF AVAILABILITY, CROSSING THE TRACK WHERE EVER REQUIRED ETC. COMPLETE USING CONTRACTORS LABOUR, VEHICLE AND CONSUMABLES. (PAYMENT BY STACK MEASUREMENTS WITHOUT ANY DEDUCTION FOR VOIDS) 9. THE WORK ORDER SHOWS THAT THE APPELLANT HAS TO SUPPLY MATERIAL AND STOCK IT AT RAILWAY SITE. THE ASSESSEE HAS ALSO STATED THAT HE IS IN THE BUSINESS OF SUPPLYING METAL TO THE RAILWAYS AND PUBLIC. IT IS NOT THE CASE OF THE ASSESSEE I.T.A. NO.492/C/2016 6 THAT THE MATERIAL OWNED BY RAILWAYS WAS TRANSPORTED FROM ITS QUARRY TO THE RAILWAY BALLAST. THE DELIVERY OF GOODS TAKES PLACE AT THE BALLAST SITE OF RAILWAYS, THEREFORE AS PER SALE OF GOODS ACT ALSO THE SALE TAKES PLACE ONLY WHEN THE MATERIAL IS HANDED OVER TO THE RAILWAYS. IN FACT IT IS A CASE OF TRANSPORTATION OF THE MATERIAL OWNED BY THE APPELLANT AND NOT THE MATERIAL OWNED BY SOME ONE ELSE. THE VEHICLES ARE USED AS PER THE REQUIREMENT ASCERTAINED BY THE APPELLANT HIMSELF. THE CONTROL OVER THE VEHICLES REMAINS WITH THE APPELLANT. UNDER THESE CIRCUMSTANCES, IT CANNOT BE SAID THAT THE VEHICLES WERE GIVEN ON HIRE TO RAILWAYS OR PUBLIC. THE RELIANCE PLACED BY THE APPELLANT ON THE OBSERVATIONS OF THE HONBLE SUPREME COURT THAT THE TRUE TEST IS THE USER OF THE SAME IN THE BUSINESS OF THE ASSESSEE OF TRANSPORTATION IS MISPLACED. WHAT THE HONBLE SUPREME COURT HAS SAID IS THAT THE VEHICLES SHOULD BE USED IN THE BUSINESS OF TRANSPORTATION OF THE ASSESSEE I.E.. THE BUSINESS OF ASSESSEE SHOULD BE TRANSPORTATION. SINCE IN THIS CASE THE ASSESSEE IS NOT IN THE BUSINESS OF TRANSPORTATION AND TRANSPORTATION OF METAL IS JUST INCIDENTAL TO THE BUSINESS OF SALE OF METAL TO RAILWAYS/PUBLIC, THE RELIANCE PLACED BY THE APPELLANT IS NOT CORRECT. DURING THE APPELLATE PROCEEDINGS AS NOTED VIDE ORDER SHEET ENTRY DATED 26-11-2012, THE COUNCIL OF THE APPELLANT STATED THAT NO VEHICLE WAS GIVEN ON HIRE TO ANY PARTY. IN VIEW OF THE ABOVE, IT IS HELD THAT ASSESSEE IS NOT IN THE BUSINESS OF RUNNING OF VEHICLES ON HIRE. 8. ADMITTED FACTS ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SELLING OF METALS AND THE ASSESSEE HAS USED HIS OWN VEHICLES FOR TRANSPORTING THE METALS MAINLY TO RAIL WAY YARD. ACCORDING TO THE ASSESSEE, THE TRANSPORTATION CHARG ES ARE PAID SEPARATELY BY THE RAILWAYS AND HENCE THE VEHICLES S HOULD BE CONSIDERED AS RUN ON HIRE. I.T.A. NO.492/C/2016 7 9. THE ASSESSEE HAS PLACED RELIANCE IN THE CASE OF M/S STANES TYRE AND RUBBER PRODUCTS LTD (REFERRED SUPRA). WE HAVE GONE THROUGH THE SAID DECISION AND NOTICE THAT THE FACTS PREVAILING IN THAT CASE WAS NOT FOUND DISCUSSED BY HONBLE MADRAS HIGH COURT. THE HONBLE MADRAS HIGH COURT APPEAR TO HAVE MAINLY DEC IDED THAT THE VANS AND THREE WHEELERS USED AS GOODS VEHICLES ARE ENTITLED TO HIGHER DEPRECIATION IF THEY ARE USED FOR HIRE OR RE WARD. HENCE, IN OUR VIEW, THE ASSESSEE CANNOT DERIVE SUPPORT FROM T HE SAID DECISION. IN THE CASE OF GUPTA GLOBAL EXIM (P) LTD , THE HONBLE SUPREME COURT IN CLEAR TERMS HAS OBSERVED AS UNDER: - UNDER ITEM 2(II) OF HEADING III, THE HIGHER RATE O F DEPRECIATION IS ADMISSIBLE ON MOTOR TRUCKS USED IN A BUSINESS OF RUNNING THEM ON HIRE. THEREFORE, THE U SER OF THE SAME IN THE BUSINESS OF THE ASSESSEE OF TRANSPO RTATION IS THE TEST..... IN OUR VIEW, THE ENTIRE APPROACH OF THE COMMISSIONE R OF INCOME TAX (APPEALS) WAS ERRONEOUS WHEN HE HAS STAT ED THAT THE TRANSPORTATION INCOME OF RS.12,50,639 BY W AY OF RUNNING THE SUBJECT VEHICLES ON HIRE IS AN INTEGRAL PART OF THE APPELLANTS BUSINESS AND ITS INCLUSION IN THE H EAD BUSINESS INCOME IS NOT DISPUTED BY THE ASSESSING OFFICER. IN OUR VIEW, MERE INCLUSION OF RS.12,50,639/- IN TH E TOTAL BUSINESS INCOME IS NOT THE DETERMINATIVE FACTOR FOR DECIDING WHETHER TRUCKS WERE USED BY THE ASSESSEE DURING THE RELEVANT YEAR IN A BUSINESS OF RUNNING THEM ON HIRE. IN OUR VIEW, THE COMMISSIONER OF INCOME TAX (APPEALS) HAD ERRED IN RELYING UPON T HE ACCRUAL OF INCOME AS A DETERMINATIVE FACTOR FOR COM ING TO THE CONCLUSION THAT THE TRUCKS WERE USED IN A BUSIN ESS OF RUNNING THEM ON HIRE. SINCE THE ASSESSEE IS COLLECTING TRANSPORT CHARGES FROM THE RAILWAYS, IT IS CONTENDED THAT THE ASSESSEE IS IN T HE BUSINESS OF TRANSPORTATION OF GOODS. HOWEVER, THE HONBLE SUPR EME COURT IN THE ABOVE CITED CASE, HAS CLEARLY EXPRESSED THE VIE W THAT THE MERE RECEIPT OF TRANSPORT CHARGES IS NOT DETERMINAT IVE FACTOR. THUS THE REAL TEST IS WHETHER THE ASSESSEE HAS USED THE VEHICLES IN THE BUSINESS OF RUNNING THEM ON HIRE. 10. IN THE INSTANT CASE, THE ASSESSEES BUSINES S IS SUPPLYING METALS OBTAINED FROM THE QUARRY OWNED BY HIM. ACCO RDING TO THE I.T.A. NO.492/C/2016 8 CONTRACT ENTERED WITH RAILWAYS, THE ASSESSEE IS REQ UIRED TO SUPPLY THE METALS AT THE PLACE SPECIFIED IN THE CONTRACT. THUS, AS OBSERVED BY LD CIT(A), IT IS THE RESPONSIBILITY OF THE ASSESSEE TO TRANSPORT THE METALS TO THE PLACE SPECIFIED BY THE RAILWAYS. SINCE THE ASSESSEE WAS REQUIRED TO TRANSPORT THE METALS T O DIFFERENT PLACES, IT WAS ADVANTAGEOUS FOR BOTH THE ASSESSEE A S WELL AS FOR THE RAILWAYS TO FIX A PRICE FOR THE METALS AND TO FIX TRANSPORT CHARGES SEPARATELY. HENCE, THE TRANSPORTATION OF M ETALS IN THE VEHICLES OWNED BY THE ASSESSEE IS PART OF THE BUSIN ESS CARRIED ON BY THE ASSESSEE, VIZ., OPERATING A QUARRY AND SUPPL YING CRUSHED METALS. HENCE, WE AGREE WITH THE VIEW EXPRESSED BY THE LD. CIT(A) THAT THE TRANSPORTATION IS INCIDENTAL TO THE BUSINESS OF SALE OF METAL TO RAILWAYS/PUBLIC. ACCORDINGLY, WE CONCU R WITH THE VIEW OF LD CIT(A) THAT THE ASSESSEE WAS NOT ENGAGED IN T HE BUSINESS OF RUNNING THE VEHICLES ON HIRE. 11. WE NOTICE THAT A SIMILAR VIEW HAS BEEN EXPR ESSED BY THE HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF KA ILASH CHAND BAGARIA VS. CIT AND ANOTHER (249 ITR 720). IN THE SAID CASE, THE ASSESSEE THEREIN WAS ENGAGED IN THE BUSINESS OF MAN UFACTURE AND TRADING IN LIMESTONE. HE ALSO USED TRUCKS FOR TRANSPORTING LIMESTONE AND CLAIMED A HIGHER RATE OF DEPRECIATION . THE HONBLE HIGH COURT HELD THAT THE DOMINANT PURPOSE FOR WHICH THE ASSESSEE USED THE TRUCKS HAS BEEN FOUND TO BE FOR H IS OWN BUSINESS AND HENCE THE ASSESSEE IS NOT ENTITLED TO HIGHER RATE OF DEPRECIATION. SIMILAR VIEW WAS EXPRESSED BY THE H ONBLE KARNATAKA HIGH COURT IN THE CASE OF VENEER MILLS VS . CIT (201 ITR 764). WE ALSO NOTICE THAT CBDT HAS ISSUED CIRCULAR NO. 652 DATED 14-06-1993 (202 ITR (ST.) 55) WHEREIN THE CBD T HAS ALSO EXPRESSED SIMILAR VIEW. FOR THE SAKE OF CONVENIENCE , WE EXTRACT BELOW THE CIRCULAR NO. 652 REFERRED ABOVE: CIRCULAR NO. 652, DATED 14 TH JUNE, 1993 TO. ALL CHIEF COMMISSIONERS OF INCOME-TAX / ALL DIRECTORS-GENERAL OF INCOME-TAX SIR, SUBJECT: SECTION 32 OF THE INCOME-TAX ACT, 1961 RATE OF DEPRECIATION ON MOTOR LORRIES USED IN THE BUSINESS OF TRANSPORTATION OF GOODS REGARDING. I.T.A. NO.492/C/2016 9 UNDER SUB-ITEM 2(II) OF ITEM NO. III OF APPENDIX I TO THE INCOME- TAX RULES, 1962 HIGHER RATE OF DEPRECIATION IS ADMI SSIBLE ON MOTOR BUSES, MOTOR LORRIES AND MOTOR TAXIS USED IN A BUSI NESS OF RUNNING THEM ON HIRE. A QUESTION HAS BEEN RAISED AS TO WHE THER, FOR DERIVING THE BENEFIT OF HIGHER DEPRECIATION, MOTOR LORRIES M UST BE HIRED OUT TO SOME OTHER PERSON OR WHETHER THE USER OF THE SAME I N THE ASSESSEES BUSINESS OF TRANSPORTATION OF GOODS ON HIRE WOULD S UFFICE. 2. IN BOARDS CIRCULAR NO. 609, DATED 29 TH JULY 1991, IT WAS CLARIFIED THAT WHERE A TOUR OPERATOR OR TRAVEL AGENT USES MOT OR BUSES OR MOTOR TAXIES OWNED BY HIM IN PROVIDING TRANSPORTATI ON SERVICES TO TOURISTS, HIGHER RATE OF DEPRECIATION WOULD BE ALLO WED ON SUCH VEHICLES. IT IS FURTHER CLARIFIED THAT HIGHER DEPR ECIATION WILL ALSO BE ADMISSIBLE ON MOTOR LORRIES USED IN THE ASSESSEES BUSINESS OF TRANSPORTATION OF GOODS ON HIRE. THE HIGHER RATE O F DEPRECIATION, HOWEVER, WILL NOT APPLY IF THE MOTOR BUSES, MOTOR L ORRIES, ETC. ARE USED IN SOME OTHER NON-HIRING BUSINESS OF THE ASSES SEE. 3. THIS MAY BE BROUGHT TO THE NOTICE OF ALL THE OF FICERS IN YOUR CHARGE. 12. WE HAVE ALREADY NOTICED THAT THE ASSESSEE IS NO T ENGAGED IN THE BUSINESS OF RUNNING THE VEHICLES ON HIRE. T HE FACTS PREVAILING IN THE DECISION RENDERED BY HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF KAILASH CHAND BAGARIA VS. CIT AND ANOTH ER (SUPRA) IS IDENTICAL TO THE FACTS PREVAILING IN THE INSTANT CA SE. HENCE, WE DO NOT FIND ANY INFIRMITY IN THE DECISION RENDERED BY THE LD. CIT(A) IN HOLDING THAT THE ASSESSEE IS NOT ENTITLED FOR A HIG HER RATE OF DEPRECIATION ON THE VEHICLES USED IN HIS OWN BUSINE SS. ACCORDINGLY, WE CONFIRM HIS ORDER. 13. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. 7.1 IN VIEW OF THE ORDER OF THE CO-ORDINATE BENCH , WE ARE INCLINED TO DISMISS GROUND NO. 2 TAKEN BY THE ASSESSEE. I.T.A. NO.492/C/2016 10 8. GROUND NO. 3 IS WITH REGARD TO DISALLOWANCE U/S.14A OF THE IT ACT WHICH READS AS FOLLOWS: THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S. 14A OF THE IT ACT, R.W.S. 8D IN RESPEC T OF THE INVESTMENTS MADE BY THE APPELLANT IN THE SHARES OF HARMONIA AYURVEDA HEALTH GARDENS PVT. LTD. THE LEARNED CIT(A) OUGHT TO HAVE NOTED THAT TH E APPELLANT HAD NOT EARNED ANY DIVIDEND FROM THE ABOVE INVESTMENTS. TH E LEARNED CIT(A) OMITTED TO NOTE THAT PROVISIONS OF SEC. 14A OF THE IT ACT, R.W.R. 8D HAS NOT APPLICATION IN APPELLANTS CASE SINCE THE INVESTMEN TS MADE BY THE APPELLANT WERE NOT FOR THE PURPOSE OF EARNING EXEMPT INCOME, BUT FOR GETTING THE ADVANTAGE OF SYNERGY OF HAVING HOTEL PROPERTIES AT VARIOUS TOURIST LOCATIONS. THE LEARNED CIT(A) ERRED ON HOLDING THAT THE PURPOS E AND MODE OF MAKING THE INVESTMENTS ARE NOT RELEVANT WHILE APPLYING THE PROVISIONS OF SEC. 14A OF THE IT ACT. 8.1 THE FACTS OF THE CASE ARE THAT THE ASSESSEE-C OMPANY IS ENGAGED IN THE HOSPITALITY BUSINESS AND RUNS HOTELS AND RESTAURANT S. I NVESTMENTS IN SHARES ARE MADE THROUGH THE APPELLANT COMPANY, BEING THE FLAGS HIP COMPANY IN THE GROUP. THE ASSESSEE MADE INVESTMENTS IN SHARES OF ANOTHER COMPANY CALLED M/S. HARMONIA AYURVEDA HEALTH GARDEN PRIVATE LIMITED (HE REINAFTER REFERRED TO AS 'HARMONIA'), RUNNING HOTELS AND RESTAURANT AT KOVAL AM. THE LEARNED AO DISALLOWED AN AMOUNT OF RS. 37,44,015/- U/S. 14A OF THE IT ACT, R.W.R. 8D STATING THAT SINCE THE INCOME WHICH SHALL BE DERIVED FROM T HE INVESTMENT WILL BE EXEMPT, CORRESPONDING EXPENSES SHOULD ALSO BE REDUCED FROM TOTAL EXPENDITURE. THOUGH THE ASSESSEE HAD NOT INCURRED ANY INDIRECT EXPENSES , THE AO APPLIED PROVISIONS OF RULE 8 D, WHILE ARRIVING AT THE AMOUNT OF DISALL OWANCE. I.T.A. NO.492/C/2016 11 8.2 ON APPEAL, THE LEARNED CIT (A) CONFIRMED THE DECISION OF THE AO RELYING ON THE RATIO DECISION OF BOMBAY HC IN THE CASE OF GODR EJ & BOYCE MFG CO. LTD V. CIT (328 ITR 81) AND ON THE CBDT CIRCULAR NO. 5/201 4 DT 11.02.2014. 8.3 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFOR E US. THE LD. AR SUBMITTED THAT THE INVESTMENTS MADE WERE NOT MEANT TO EARN EXEMPT INCOME. IT WAS SUBMITTED THAT OUT OF THE SHARE CAPITAL COMPRISING OF 15000 S HARES, THE ASSESSEES INVESTMENT AMOUNTS TO 14970 SHARES, I.E., 99.80%, A S A RESULT, HARMONIA WAS A SUBSIDIARY OF THE ASSESSEE-COMPANY. IT WAS SUBMITTE D THAT INVESTMENT IN SHARES OF HARMONIA WERE MADE OUT OF THE LOAN FROM AXIS BAN K AND THE PROPORTIONATE INTEREST PAID TOWARDS INVESTMENT MADE WAS RS .24,22,223/-. ACCORDING TO THE LD.AR THE SAID INVESTMENT HAS BEEN CL ASSIFIED AS 'TRADE' INVESTMENTS, MEANING THAT THE INVESTMENTS MADE WERE IN RELATION TO THE BUSINESS OF THE ASSESSEE. IT WAS SUBMITTED THAT TH E ASSESSEE WAS TO MAKE ADDITION TO FIXED ASSETS BY PURCHASE OF ALL THE ASS ETS AND LIABILITIES OF AN EXISTING HOTEL AT KOVALAM OWNED BY A COMPANY (HARMONIA). THE LD. AR SUBMITTED THAT INSTEAD OF PURCHASING THE FIXED ASSETS OF HARMONIA, SO AS TO REDUCE THE TRANSACTION COST, SHARES OF THAT COMPANY (HARMONIA) WERE PURCHASED USING LOAN FROM AXIS BANK. ACCORDING TO THE LD. AR IF ASSETS W ERE PURCHASED USING THE SAME BANK LOAN, NO DISALLOWANCE COULD HAVE BEEN MADE U/S . 14 A OF THE IT ACT. HENCE IT WAS SUBMITTED THAT PURCHASE OF SHARES ALSO MAKES NO DIFFERENCE AND THE I.T.A. NO.492/C/2016 12 ASSESSEE HAD NOT EARNED ANY EXEMPT INCOME FROM THE SAID INVESTMENT DURING THE YEAR. 8.4 THE LD. AR RELIED ON THE FOLLOWING CASE LAWS IN SUPPORT OF ITS STAND: A) NO DISALLOWANCE IF THERE IS NO EXEMPT INCOME THE ITAT COCHIN BENCH IN THE CASE OF PTL ENTERPRISES LTD (ITA NO. 200/COCH/2015 HELD RELYING ON VARIOUS SETTLED JUDI CIAL DECISIONS THAT DISALLOWANCE U/S 14A CANNOT EXCEED EXEMPT INCOME AN D SINCE THERE WAS NO EXEMPT INCOME DECLARED AND CLAIMED BY THE SA ID ASSESSEE, THE DISALLOWANCE MADE BY AO AND SUSTAINED BY CIT (A) WA S DELETED. THE LD. AR SUBMITTED THAT THIS CASE WAS IDENTICAL TO TH E ASSESSEES CASE. IT IS NOT DISPUTED THAT THE ASSESSEE HAS NOT EARNED EX EMPT INCOME FROM INVESTMENTS IN HARMONIA. HENCE, IT WAS SUBMITTED TH AT T HE DISALLOWANCE MADE IS AGAINST THE SETTLED LAW AND HE NCE REQUIRES TO BE DELETED. B) NO DISALLOWANCE U/S.14 A IF THE INVESTMENT MADE IS NOT MEANT TO EARN ANY EXEMPT INCOME THE ITAT CHENNAI BENCH HELD IN THE CASE OF L & T IN FRASTRUCTURE DEVELOPMENT PROJECTS LTD. V. ITO (58 TAXMANN.COM 16 5 -2015) THAT EXPENSES AND INTEREST ATTRIBUTABLE TO INVESTMENTS M ADE BY THE ASSESSEE IN SPECIAL PURPOSE VEHICLES (SPV) COULD NOT BE DISA LLOWED U/S.14A R.W.R I.T.A. NO.492/C/2016 13 8D OF THE IT ACT, AS IT COULD NOT BE TERMED AS EXPE NSES INCURRED FOR EARNING EXEMPT INCOME. IT WAS SUBMITTED THAT IN THE ABOVE CASE, THE ASSESSEE HAD TO FORM A SPV IN ORDER TO OBTAIN CONTR ACTS FROM NHAI AND THE SAME WAS USED TO EXECUTE WORKS AWARDED BY NHAI. THE ITAT, CHENNAI HELD THAT IN SUCH A CIRCUMSTANCE, NO DISALLOWANCE OUGHT TO HAVE BEEN MADE U/S.14 A OF THE IT ACT. THE LD. AR SUBMITTED THAT SIMILAR VIEW WAS TAKEN BY DELHI HIGH COURT IN THE CASE OF CIT V. ORIENTAL STRUCTURAL ENGINEE RS P. LTD (216 TAXMAN 92) . THE LD. AR ALSO RELIED ON THE DECIS ION OF CHENNAI TRIBUNAL IN THE CASE OF NMS CONSULTANCY P. LTD .V. DY. CIT (2013) 22 ITR TRIB 400 (CHENNAI) C) THE INTENTION OF MAKING INVESTMENT IS ALSO TO B E LOOKED INTO WHILE APPLYING THE PROVISIONS OF SEC. 14A R.W.R 8D THE LD. AR RELIED ON THE DECISION IN THE CASE OF MS A SECURITIES P. LTD. VS. ACIT (2013) - 58 SOT 44 (URO) CHENNAI (TRIB.) THE LD. AR SUBMITTED THAT IN THE ABOVE DECISION, THE TRIBUNAL HELD THAT THE INTENTION OF THE ASSESSEE CANNOT BE TREATED AS IRRELEVANT. IN THE CASE OF ASSESSEE, THE PURPOSE OF MAKING INVESTMENT WAS TO ENSURE SYN ERGY OF HAVING HOTEL PROPERTIES IN ALL IMPORTANT TOURIST DESTINATIONS IN KERALA AND THE ABOVE DECISIONS ARE APPLICABLE. THE LD. AR ALSO RELIED ON THE ON I.T.A. NO.492/C/2016 14 THE DECISION OF ITAT MUMBAI, IN THE CASE OF GARWARE WALL ROPES LTD V. ACIT (46 TAXMANN.COM 18), WHICH WAS RELIED UPON BY THE TRIBUNAL IN MSA SECURITIES CASE. D) NO DISALLOWANCE U/S.14 A IF THE INVESTMENT MADE IS. A STRATEGIC INVESTMENT IN SUBSIDIARY. THE LD. AR SUBMITTED THAT IN THE CASE OF CHEMINVEST V. CIT, THE DELHI HIGH COURT HAS, RELYING ON THE DECISION OF CIT V. H OLCIM INDIA (P.) LTD. [2015] 57 TAXMANN.COM 28 (DELHI), HELD THAT IN THE CASE OF AN ASSESSEE WHO HAS MADE STRATEGIC INVESTMENT IN SHARES OF ANOT HER COMPANY AND NO EXEMPTED INCOME WAS EARNED BY THE ASSESSEE IN TH E RELEVANT ASSESSMENT YEAR AND THE GENUINENESS OF THE EXPENDIT URE INCURRED BY THE ASSESSEE IS NOT IN DOUBT, NO DISALLOWANCE U/S.! 4A, R.W.R 8D CAN BE MADE. THE LD. AR SUBMITTED THAT IN THE ASSESSEES C ASE, THE INVESTMENT MADE IN SHARES OF HARMONIA WAS A STRATEGIC INVESTME NT AND THE PURPOSE OF MAKING INVESTMENT WAS NOT TO EARN DIVIDE ND INCOME AND IT IS AN UNDISPUTED FACT THAT THE APPELLANT HAS NOT RE CEIVED ANY DIVIDEND INCOME, HENCE NO DISALLOWANCE IS TO BE MADE U/S. 14 A R.W.R 8D OF THE ACT. THE LD. AR ALSO RELIED ON THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF JM FINANCIAL LTD .V. ACIT (MUM.)(TRIB.) WHEREIN TH E TRIBUNAL HELD THAT NO DISALLOWANCE SHALL BE MADE U/ S. 14A IN RESPECT OF STRATEGIC INVESTMENT IN THE ABSENCE OF TAX FREE INC OME. I.T.A. NO.492/C/2016 15 E) NO DISALLOWANCE U/S.14A, R.W.R. 8D IN RESPECT OF BORROWED FUNDS, IF THE ASSESSEE HAS NOT RECEIVED EXEMPT INCOME THE LD. AR RELIED ON THE JUDGMENT OF THE GUJARAT HI GH COURT IN THE CASE OF CIT V. CORRTECH ENERGY PVT LTD (272 CTR 262/223 TAXMAN 130) WHERE IT WAS HELD THAT NO DISALLOWANCE U/S 14A, R.W .R 8D CAN BE MADE IN RESPECT OF INTEREST EXPENDITURE IF THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME. THE LD. AR ALSO RELIED ON THE DECISION OF THE ITAT CHENNAI BENCH IN THE CASE OF SIVA INDUSTRIES HOLDING LTD V. ACIT (14 5 TTJ 497) WHEREIN IT WAS HELD THAT IF THE INVESTMENTS MADE BY THE ASS ESSEE HAD GENERATED ANY DIVIDEND INCOME WHICH HAD BEEN CLAIMED BY THE ASSES SEE TO BE NOT TO FORM PART OF TOTAL INCOME, NO DISALLOWANCE U/S. 14A COULD BE MADE, EVEN TOWARDS INTEREST BORROWED FUNDS USED FOR MAKIN G INVESTMENTS. THE LD. AR ALSO RELIED ON THE JUDGMENT OF THE P&H H IGH COURT IN THE CASE OF CIT V. M/S. LAKHANI MARKETING INC. (272 CTR 265) WHEREIN IT WAS HELD THAT UNLESS AND UNTIL THERE IS RECEIPT OF EXEMPTED INCOME FOR CONCERNED ASSESSMENT YEARS (DIVIDEND FROM SHARES) S ECTION 14A CANNOT BE INVOKED TOWARDS DIRECT EXPENDITURE. THE LD. AR ALSO RELIED ON THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF CI T V. DELITE ENTERPRISES IN ITA NO. 110/2009 DATED 26/02/2009 WHE REIN IT WAS HELD I.T.A. NO.492/C/2016 16 THAT IN THE ABSENCE OF TAX FREE INCOME, EXPENDITURE (INCLUDING INTEREST) EXPENDITURE CAN BE DISALLOWED U/S.14 A OF THE ACT. F) APPLICABILITY OF CBDT CIRCULAR NO.5/2014 DT 11 .02.2014 RELIED ON BV THE CIT(A) THE LD. AR SUBMITTED THAT THE BOVE CIRCULAR RELIED UPON BY THE CIT (A) IS NOT BINDING ON THE ASSESSEE, SINCE THE CBDT CIRC ULAR CAN NOT OVERRIDE THE PROVISIONS OF SEC. 14A OF THE ACT. HENCE, IT W AS SUBMITTED THAT IN THE ABSENCE OF ANY TAX FREE INCOME, THERE IS NO QUE STION OF APPLICABILITY OF SEC. 14A R.W.R 8D OF THE IT ACT. CBDT CIRCULAR DT 02.05.2016 THE LD. AR SUBMITTED THAT THE CBDT CIRCULAR DT 02.0 5.2016, WHICH AMENDED RULE 8 D HAS NO APPLICATION TO THE ASSESSEE S CASE, RELATING TO AY 2009-10. THE LD. AR SUBMITTED THAT THE DECISION RELIED UPON BY THE CIT(A) IN THE CASE OF GODREJ & BOYCE MFG CO. LTD WAS RENDERED IN THE CONTEXT OF EXEMPT ACTUALLY EARNED BY THE ASSESSEE AND FOR THE AY 2002-03, I.E., FOR AN YEAR PRIOR TO INTRODUCTION OF PROVISION OF R ULE 8 D. IT WAS SUBMITTED THAT IN THE CASE OF THE ASSESSEE, THERE W AS NO DIVIDEND INCOME AND HENCE THE SAID DECISION WAS NOT APPLICAB LE. HENCE IT WAS I.T.A. NO.492/C/2016 17 SUBMITTED THAT FOLLOWING THE ABOVE DECISIONS, THE D ISALLOWANCE IS TO BE DELETED. 8.5 THE LD. DR RELIED ON THE ORDER OF THE LOWER AUTHORITIES. 8.6 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERU SED THE MATERIAL ON RECORD. THE CONTENTION OF THE ASSESSEE IS THAT THERE IS NO EXEMPTED INCOME EARNED BY THE ASSESSEE. HOWEVER IT SEEMS FROM THE FACTS OF T HE CASE THAT THE ASSESSEE INCURRED DIRECT EXPENDITURE ON THE INVESTMENTS MADE IN EXEMPTED INCOME YIELDING ASSET. SINCE THE ASSESSEE INCURRED DIRECT EXPENDITURE WHICH WAS IDENTIFIED BY THE ASSESSING OFFICER AND IT IS NOT D ISPUTED BY THE ASSESSEE, IN OUR OPINION, RULE 8D(2(I) IS DIRECTLY APPLICABLE. 8.7 FURTHER, THE SUPREME COURT IN THE CASE OF MAX OPP INVESTMENT LTD. VS. CIT IN CIVIL APPEAL NO. 104-109/2015 VIDE JUDGMENT DATE D 12/2/2018 OBSERVED THAT EXPENDITURE INCURRED IN RESPECT OF INVESTMENT IN SH ARES OF THE OPERATING COMPANIES FOR ACQUIRING AND RETAINING CONTROLLABLE INTEREST CANNOT BE ALLOWED. IN OTHER WORDS, THE DOMINANT PURPOSE FOR WHICH THE INV ESTMENT IN SHARES IS MADE BY AN ASSESSEE IS NOT RELEVANT IN DETERMINING THE A LLOWABILITY OF THAT EXPENDITURE AND SECTION 14A OF THE ACT HAS TO BE INTERPRETED PA RTICULARLY, THE WORD IN RELATION TO THE INCOME THAT DOES NOT FORM PART OF THE TOTAL INCOME. IF THE EXPENDITURE IS INCURRED IN MAKING INVESTMENT WHICH YIELD EXEMPT INCOME, THAT I.T.A. NO.492/C/2016 18 MUCH OF EXPENDITURE WHICH IS ATTRIBUTABLE TO THAT I NCOME IS TO BE DISALLOWED AND CANNOT BE TREATED AS BUSINESS EXPENDITURE. FURTHER , IT WAS HELD THAT THE TERM EXPENDITURE INCURRED AS RECURRING IN SECTION 14A( I) OF THE ACT MEANS INCURRING OF ACTUAL EXPENDITURE AND NOT SOME IMAGINED EXPENDI TURE. THE ACTUAL EXPENDITURE THAT IS IN CONTEMPLATION UNDER SECTION 14A(I) OF THE ACT IS THE ACTUAL EXPENDITURE IN RELATION TO OR IN CONNECTIO N WITH OR PERTAINING TO EXEMPTED INCOME. HENCE, IF NO EXPENDITURE IS INCUR RED IN RELATION TO EXEMPTED INCOME, NO DISALLOWANCE CAN BE MADE UNDER SECTION 1 4A OF THE IT ACT. IT WAS FURTHER OBSERVED THAT ONLY THAT EXPENDITURE WHICH H AS BEEN INCURRED IN RELATION TO NON-TAXABLE INCOME HAS TO BE DISALLOWED. IF AN E XPENDITURE INCURRED HAS NO PRINCIPAL CONNECTION WITH THE EXEMPTED INCOME, TH EN SUCH AN EXPENDITURE WOULD CLEARLY BE TREATED AS NOT IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, AND SUCH EXPENDITURE WOU LD BE ALLOWED AS BUSINESS EXPENDITURE. 8.8 IN VIEW OF THE ABOVE, IN THE PRESENT CASE, DI RECT EXPENDITURE HAS BEEN INCURRED ON THE INVESTMENT MADE IN SISTER CONCERN. SUCH EXPENDITURE HAS TO BE I.T.A. NO.492/C/2016 19 DISALLOWED. HENCE WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) AND CONFIRM THE SAME. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSES SEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THI S 21 ST MARCH, 2018. SD/- SD/- ( GEORGE GEORGE K.) (CHAN DRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: DATED: 21 ST MARCH, 2018 GJ COPY TO: 1. M/S. ABAD HOTELS (INDIA) P. LTD., M.G. ROAD, KOC HI-35. 2. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1(1), KOCHI. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS)-I, KOCHI 4. THE PR. COMMISSIONER OF INCOME-TAX, KOCHI 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRA R) I.T.A.T. , COCHIN