Deepak Cables (India) Ltd., Bangalore V. Addl..C.I.T., Bangalore

ITA 493/BANG/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5431 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-05-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 25-10-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 11-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Earning of tax free income; Notional interest; Commercial expediency
• Section: 143(3); 14A

Judgement Text

ITA.493& 669/BANG/2014 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU BENCH 'C', BENGALURU BEFORE SHRI. VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI. S. JAYARAMAN, ACCOUNTANT MEMBER I.T.A NO.493/BANG/2014 (ASSESSMENT YEAR : 2010-11) DEEPAK CABLE (INDIA) LTD, NO.7, N8, IYENGAR STREET, SESHADRIPURAM, BENGALURU 560 020 .. APPELLANT PAN : AAACD6466C V. ADDITIONAL COMMISSIONER OF INCOME TAX, RANGE-11, BENGALURU .. RESPONDENT I.T.A NO.669/BANG/2014 (ASSESSMENT YEAR : 2010-11) ADDITIONAL COMMISSIONER OF INCOME TAX, RANGE-11, BENGALURU .. APPELLANT V DEEPAK CABLE (INDIA) LTD, NO.7, N8, IYENGAR STREET, SESHADRIPURAM, BENGALURU 560 020 .. RESPONDENT PAN : AAACD6466C ASSESSEEBY :SHRI. SURESH MUTHUKRISHNAN, CA REVENUE BY : SHRI. SANJAY KUMAR, CIT-III HEARD ON : 08.02.2017 PRONOUNCED ON : 05.05.2017 O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER : THESE CROSS APPEALS ARE FILED BY THE ASSESSEE AND THE REVENUE, RESPECTIVELY, AGAINST THE ORDER OF THE CIT (A)-I, B ENGALURU, FOR THE ASSESSMENT YEAR 2010-11. ITA.493& 669/BANG/2014 PAGE - 2 02. THE ASSESSEE IS ENGAGED IN THE MANUFACTURE AND SALE OF POWER TRANSMISSION CONDUCTORS AND IN ERECTION AND COMMISS IONING CONTRACTS WHICH INVOLVES SETTING UP OF TRANSMISSION LINES AND INSTALLATION OF SUB STATIONS UNDER TENDER FROM POWER DISTRIBUTION COMPA NIES. FOR THE ASSESSMENT YEAR 2010-11, IT FILED ITS RETURN ON 14 .10.2010, DECLARING THE TOTAL INCOME AT RS.78,34,05,920/-. IN THE ASSESSMEN T MADE U/S 143(3) DT 31.01.2013, INTER ALIA, THE AO MADE DISALLOWANCES ; U/S14A RW R 8D(2) (II) AT RS.26,93,672/-, RS.3,50,154/- U/S14A RWR 8D(2) (III) & ON PROFESSIONAL EXPENSES AT RS.2,59,47,337/-, CAPITALISED THE INTE REST CLAIM AT RS.7,15,44,313/- TO CAPITAL WORK IN PROGRESS AND D ISALLOWED INTEREST AT RS.2,27,14,151/- TOWARDS THE AMOUNTS ADVANCED TO SI STER CONCERNS. THE A O ALSO CHARGED INTEREST U/SS 243 A, B & C. THE ASS ESSE FILED AN APPEAL BEFORE THE CIT (A). THE CIT (A) , OUT OF THE ABOVE ISSUES, CONFIRMED THE DISALLOWANCES MADE U/S14A RW R 8D(2) (III) AT RS.3 ,50,154/- , ON PROFESSIONAL EXPENSES AT RS.2,59,47,337/- AND LEVY OF INTEREST U/SS 243A, B & C AND DELETED ALL OTHER DISALLOWANCES. AGGRIEVE D, THE ASSESSE FILED APPEAL WITH THE FOLLOWING GROUNDS: ITA.493& 669/BANG/2014 PAGE - 3 03. AGGRIEVED BY THE CIT(A) ORDER, THE REVENUE ALS O FILED AN APPEAL WITH THE FOLLOWING GROUNDS : ITA.493& 669/BANG/2014 PAGE - 4 7. THE CIT (A) ERRED IN NOT APPRECIATING THAT HIS D ECISION THAT THE MAJOR LOAN GIVEN TO BRINDAVAN HYDRO POWER LTD IS FOR BUSINESS EXIGENCI ES FOR THE ONLY REASON THAT THE ASSESSEE IS ENGAGED IN GENERATION AND SALE OF WIND POWER IS WITHOUT ANY VALID EVIDENCE. 04. THE AR SUBMITTED THAT AO NOTED THAT THE ASSESSE E HAD MADE INVESTMENTS IN SHARES OF M/S. BRINDAVAN HYDERABAD P OWER LTD. YIELDING TAX- FREE INCOME AND THAT THE INVESTMENTS WERE MADE OUT OF BORROWED CAPITAL. THE AO REJECTED THE ASSESSEES CONTENTION THAT IT H AD MADE THE INVESTMENT OUT OF ITS OWN FUNDS AND INTERNAL ACCRUALS ON THE GROUND THAT THE CASH FLOW STATEMENT FILED BY IT SHOWED NEGATIVE CASH FLOW AND THAT, EVEN IF THE ASSESSEES STATEMENTS WERE TRUE, MANDATORY DISALLOW ANCE WAS CALLED FOR U/S.14A R W R 8D. THUS, THE AO INVOKED SECTION 1 4A AND APPLIED THE FORMULA PRESCRIBED IN RULE 8D OF THE RULES AND DISA LLOWED RS.26,93,672/- U/S14A RW R 8D(2) (II) AND RS.3,50,154/- U/S14A R WR 8D(2) (III). ON THE ASSESSEESAPPEAL ,THE CIT(A) ON GOING THROUGH ITS BALANCE SHEET AS ON 31.03.2009 AND 31.03.2010, FOUND ITS FINANCIAL POS ITION AS UNDER : 31.03.2010 31.03.2009 SHARE CAPITAL 9,16,92,300 9,16,92,300 FROM WHICH, THE CIT(A) FOUND THAT THE INTEREST -FR EE FUNDS AVAILABLE AS ON 31.03.2010 HAS INCREASED BY RS.40,4 6,62,280, VIS A ITA.493& 669/BANG/2014 PAGE - 5 VISTHE FUND POSITION AS ON 31.3.2009 WHILE THE INV ESTMENT MADE AS ON 31.03.2010 WAS AT RS.14,00,30,908 AS AGAINST RS.30 ,900 AS ON 31.03.2009. SINCE THE ASSESSE IS HAVING INTEREST F REE FUNDS FOR RS.478 88,35,107, AS SUCH SUFFICIENT FUNDS FOR MAK ING INVESTMENT IN SHARES AND MUTUAL FUNDS ARE AVAILABLE. SO, THE CIT( A) FOUND FORCE IN THE ASSESSEES SUBMISSION THAT NO BORROWED FUNDS HA VE BEEN UTILISED FOR MAKING THE INVESTMENT OF RS.14,00,30,900/- ON TAX-F REE SECURITIES, THE RECEIPT FROM WHICH IS EXEMPT FROM TAX. THE CIT (A) ALSO NOTED THAT THE ASSESSEE INCURRED THE FOLLOWING INDIRECT INTEREST PAYMENT AS PER SCHEDULE 18 OF THE PROFIT AND LOSS ACCOUNT FOR THE PERIOD ENDING 31/03/2008 : AND OBSERVED THAT THE MAJOR AMOUNT OF INTEREST PAYM ENT IS TOWARDS WORKING CAPITAL LOAN. SIMILARLY, THE ASSESSEE ALSO PAID INTEREST ON TERM LOANS. A PERUSAL OF THE DETAILS OF THE SAID FINANCI AL CHARGES CLEARLY INDICATES THAT THE ABOVE INTEREST PAYMENTS ARE DIRE CTLY ATTRIBUTABLE TO THE EARNING OF BUSINESS INCOME. THEREFORE, RELYING ON THE DECISION OF THE HON'BLE TRIBUNAL OF KOLKATA BENCH IN THE CASE OF CH AMPION COMMERCIAL LTD. [139 ITD 108(KOL)], HE HELD THAT NO NE OF THE INTEREST PAYMENTS CAN BE CONSIDERED UNDER RULE 8D(2)(II) . T HUS, THE SAID PAYMENT CANNOT BE ATTRIBUTED TO THE BORROWING SPECI FICALLY USED FOR TAX ITA.493& 669/BANG/2014 PAGE - 6 EXEMPT INCOME. THERE IS NO MATERIAL / EVIDENCE ON RECORD TO SHOW THE NEXUS BETWEEN THE BORROWALS AND TAX-FREE INVESTMENT S. FURTHER, TAX FREE INVESTMENTS ARE MADE DURING THE YEAR UNDER CONSIDER ATION OUT OF INTEREST FREE FUNDS AS MENTIONED ABOVE. THEREFORE, THE CIT( A) HELD THAT NONE OF THE INTEREST PAYMENTS CLAIMED BY THE ASSESSEE CAN BE T AKEN FOR THE PURPOSE OF RULE 8D(2)(II) AND HENCE DELETED THE DISALLOWANCE O F RS.23,43,518/-. HOWEVER, FOR THE DISALLOWANCES MADE U/S 14A RWR 8D( 2) (III)AT RS.3,50,154/-, THE CIT(A) HELD THAT DISALLOWANCE U /S14A RWR 8D(2) (III) IS TOWARDS OTHER EXPENSES IN THE NATURE OF INDIRECT E XPENDITURE. THE WORD 'EXPENDITURE' USED IN SECTION 14A HAS A WIDER MEANING AND WOULD TAKE IN ITS SWEEP NOT ONLY EXPENDITURE BUT AL SO ALL FORMS OF EXPENDITURE REGARDLESS OF WHETHER IT IS FIXED, DIRE CT, INDIRECT, ADMINISTRATIVE, MANAGERIAL OR FINANCIAL. THEREFORE, THE SAID RULE PROVIDES FOR THE INDIRECT EXPENDITURE AS A FIXED PERCENTAGE OF THE AVERAGE INVESTMENTS AS PER THE FORMULA LAID DOWN. AS ALREAD Y STATED, THE AO HAS POWER TO INVOKE RULE 8D EVEN IN A CASE WHERE TH E APPELLANT CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN REL ATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS PER SUBSECTION (3) OF SECTION 14A OF THE ACT. IN THE INSTANT CASE, IT IS THE CONTENTION OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING THE EXEMPT INCOME. THE SAME CANNOT BE ACCEPTED BECAUSE THERE MAY BE SOME INDIRECT EXPENDITURE, WHICH IS NOT DIRECTLY VISIBLE. SINCE IT IS ALREADY DECIDED THAT THE TERM 'EXPENDITURE' IN S ECTION 14A INCLUDES INDIRECT EXPENDITURE, THE AO'S ACTION IN MAKING A D ISALLOWANCE OF ITA.493& 669/BANG/2014 PAGE - 7 RS.3,50,154/- IS JUSTIFIED AND IS CONFIRMED. THE A R SUBMITTED THAT THIS IS UNWARRANTED. 05. ON THE ASSOCIATED ISSUES AND ON THE REVENUES A PPEAL , THE DR SUBMITTED THAT WHEN THE ASSESSEES LOAN IS NOT SPE CIFIC RULE 8D IS APPLICABLE AND IN THIS REGARD, RELIED ON 139 ITD 10 8KOL . THE AO NOTED THAT THE ASSESSE HAD GIVEN ADVANCES AT RS.15,14,27,679/ - TO FOUR SISTER CONCERNS VIZ. M/S. SURYA TRANSMISSION LTD., M/S. AN CHOR INVESTMENT AID PVT. LTD, M/S. SHAH BROTHERS MERCHANT P. LTD AND M/ S. BRINDAVAN HYDROPOWER P. LTD. WHEN ASKED FOR CLARIFICATION, T HE ASSESSE EXPLAINED THAT THE LOAN GIVEN TO M/S. BRINDAVAN HYDROPOWER P. LTD. WAS OUT OF BUSINESS EXPEDIENCY AS IT WAS ITS A SUBSIDIARY. ON EXAMINATION OF THE CASH OUTFLOW STATEMENT, THE AO FOUNDTHAT THE NE T INCREASE IN CASH AND CASH EQUIVALENTS WAS AT RS.53,79,13,980/- AND R S.114,95,06,440/-FOR THE YEARS ENDED 31/3/2009 AND 31/3/2010 RESPECTIVEL Y; THAT THE INVESTMENTS MADE INFIXED ASSETS SUBSIDIARY COMPANIE S AND LOANS GIVEN TO SUBSIDIARY/SISTER CONCERNS WERE MADE OUT O F SECURED LOANS AMOUNTING TO RS.215.66 CRORES AND RS.158.68 CRORES AS ON 31/3/2009 AND 31/3/2018 RESPECTIVELY; THAT THE SAID INVESTMENTS AND ADVANCES WERE MADE OUT OF UNSECURED LOANS OUTSTANDI NG ON 31/3/2009 AND 31/3/2018 AT RS.97.94CRORES AND RS.33.97 CRORES RES PECTIVELY; THAT THE AGGREGATE LOAN LIABILITY OF THE APPELLANT WAS MORE THAN RS.212 CRORES AND RS.200 CRORES AS ON 31/3/2009 AND 31/3/2010; AN D THAT ALL THE LOANS VIZ, CASH CREDIT LOANS, OVERDRAFT LOANS AND OTHER U NSECURED LOANS ARE ITA.493& 669/BANG/2014 PAGE - 8 INDIRECT LOANS. THE TOTAL INDIRECT INTEREST ON CASH CREDITS AND ON OTHER LOANS AT RS.15,83,30,480/- AND RS.7,98,57,413/- AGG REGATED AT RS.23,81,90,893/-. THE AO NOTED FROM THE DETAILS FU RNISHED BY THE APPELLANT THAT THE AVERAGE OF CAPITAL WORK-IN-PROGR ESS BETWEEN 31/3/2889 AND 31/3/2010 AMOUNTED TO RS.47,69,68,892 /-. INTEREST AT 15% ON THIS AMOUNT AT RS.7,15,44,133/- WAS HELD BY THE AO TO BE CAPITAL IN NATURE AND, BY CAPITALISING THE SAME, HE DISALLOWED IT. 5.1 HOWEVER, THE CIT (A) HELD THAT THE AVERAGE OF CAPITAL WORK-IN- PROGRESS BETWEEN 31.03.2009 AND 31.03.2010 WORKED O UT TO RS. 47,69,60,892. HOWEVER, AS PER BALANCE SHEET WORK-IN -PROGRESS AS ON 31.03.2009 AT RS. 18,36,76,200 AND AS ON 31.03.2010 AT RS. 28,44,83,521 AND AVERAGE WOULD BE RS.23,40,79,860. THUS, FURTHER INCREASE IN WORK-IN-PROGRESS BY RS. 10,08,07,321, A S PER AO. INTEREST FREE FUND AS ON 31.03.2010 AT RS. 478,88,35,107 AND INCREASE DURING THE YEAR SHOWN AT RS. 40,46,62,280. ON THE O THER HAND INTEREST BEARING FUNDS REDUCED FROM RS. 313,60,44,115 TO RS. 192,65,68,325. THIS FACT INDICATES THAT INTEREST FREE FUNDS HAS BEEN UT ILISED FOR WORK- IN- PROGRESS, HENCE NO INTEREST COULD BE DISALLOWABLE. THEREFORE, HE DELETED THE ADDITION OF RS. 7,15,44,133 . 5.2 ON DISALLOWANCE OF INTEREST FREE ADVANCES GIVE N TO SISTER CONCERNS AT RS.2,27,14,151, THE DR SUBMITTED THAT THE AO FOUND THAT ITA.493& 669/BANG/2014 PAGE - 9 THE ASSESSEE HAD GIVEN ADVANCES TO SISTER CONCERNS AT RS.15,14,27,679/- FREE OF INTEREST OUT OF FUNDS BOR ROWED BY THE ASSESSE ON INTEREST. APPLYING THE RATE OF INTEREST AT 15% ON THE ADVANCES SO GIVEN, THE AO DISALLOWED A SUM OF RS.2,27,14,151/- OUT OF DEDUCTION CLAIMED TOWARDS INTEREST PAID BY IT. THE CIT (A) O N PERUSAL OF THE NOTES ON ACCOUNT NOTED THE AMOUNT OF ADVANCE AS UNDER:- NAME OF THE PARTY 3 1.03.2009 3 1.03.2010 SURYA TRANSMISSION LTD. 3,58,88,324 1,22,07,821 ANCHOR INVESTMENT AID PVT. LTD. 2,42,817 2,42,817 SHAH BROTHERS MERCHANT PVT. LTD. 87,360 1, 16, 115 BRINDAWAN HYDRO POWER PVT. LTD. - 20,33,26,399 TOTAL 3,62,18,501 21,58,93,152 THE CIT(A) HELD THAT IT SHOWS THAT LOAN AND ADVANC E GIVEN TO ASSOCIATED CONCERN INCREASED FROM RS. 3,62,18,501 T O RS. 21,58,93,152 I.E. A SUM OF RS. 17,96,74,651 FURTHER , LOANS/ADVANCE MADE DURING THE YEAR. SINCE THE APPEL LANT IS HAVING SUFFICIENT INTEREST FREE FUNDS THE LOAN GIVEN TO ITS SISTER CONCERN WAS OUT OF INTEREST FREE FUND ONLY. MOREOVER, MAJOR LOA N GIVEN TO M/S. BRINDAVAN HYDRO POWER LIMITED IS FOR BUSINESS EXIGE NCIES SINCE THE APPELLANT COMPANY ENGAGED IN THE WIND POWER GEN ERATION AND SALE. 5.3 ON THE ABOVE FACTS , THE CIT(A) HELD THAT THE A O WAS NOT JUSTIFIED IN DISALLOWING INTEREST OF RS. 2,27,14,15 1/-AND THEREFORE HE DELETED THAT ADDITION . THE DR SUBMI TTED THAT THE CIT(A) CONSIDERED ALL THESE ISSUES ON A SIMPLISTIC MANNER AND THERE IS NO ITA.493& 669/BANG/2014 PAGE - 10 COMMERCIAL EXPEDIENCY IN ADVANCING LOAN TO HYDRO PO WER COMPANY , WHICH IS NOT THE ASSESSEES LINE OF BUSINESS. IN THIS REG ARD, HE RELIED ON THE FOLLOWING DECISIONS : I) DELHI ITAT DECISION IN J. H. FIN-VEST P. LTD V. DCI T [(2014) 43 TAXMANN.COM 210 (DELHI)], WHEREIN THE TRIBUNAL HELD THAT WHERE ASSESSEE CLAIMED THAT NO EXPENDITURE WAS INCURRED T OWARDS EXEMPT INCOME BUT IT WAS FOUND THAT MAJOR PART OF AVAILABL E FUNDS WAS INVESTED IN SHARES OF VARIOUS COMPANIES, PROPORTION ATE DISALLOWANCE WAS CALLED FOR. II) THE DECISION OF GUJARAT HIGH COURT IN THE CASE OF CIT V. ARIHANT AVENUE & CREDIT LTD 9(2013) 36 TAXMANN.COM 14], WHE REIN THE HIGH COURT HELD THAT WHERE ASSESSEE HAD GIVEN INTEREST -FREE ADVANCES TO ITS SISTER CONCERN BUT IT WAS NOT CASE OF REVENUE THAT INTEREST BEARING BORROWED MONEY WAS GIVEN AS INTEREST-FREE ADVANCE T O THOSE PARTIES, NO ADDITION ON ACCOUNT OF NOTIONAL INTEREST INCOME WAS WARRANTED. III) JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF M/S. UNITED BREWERIES LTD V. DCIT IN ITA NO.419/2009, DT.31.05.2016, HAS UPHELD THAT SECTION 14A IS APPLICABLE EVEN WHERE THE MOTIVE IN ACQUIRIN G THE SHARES WAS TO OBTAIN CONTROLLING INTEREST IN THE COMPANIES. IT AL SO UPHELD THE FINDINGS THAT IT IS FOR THE ASSESSING OFFICER TO AS CERTAIN FROM THE FACTS AS TO HOW MUCH INTEREST BEARING BORROWINGS WAS UTILIZED TO ACQUIRE SHARES IN THE COMPANIES.IT IS ALSO NECESSAR Y TO SEE AS TO WHETHER ANY INTEREST BEARING BORROWED FUNDS WERE USED IN MA KING THE ADVANCES. THE ASSESSING OFFICER MAY MAKE THE DISALL OWANCE OF INTEREST U/S. 14A ONLY IF IT IS FOUND THAT INTEREST BEARING BORROWED FUNDS WERE USED TO ACQUIRE SHARES IN THE COMPANIES OR FOR MAKI NG ADVANCES AND THE BOARDS CIRCULAR NO 5/2014 DT 11.02.2014 ISSUIN G CLARIFICATION REGARDING DISALLOWANCE U/S14A. ITA.493& 669/BANG/2014 PAGE - 11 06. PER CONTRA, THE AR INVITED OUR ATTENTION TO TH E CASH-FLOW STATEMENT, WHICH IS EXTRACTED AS UNDER : F CASH AND CASH EQUIVALENTS AS AT THE END OF THE YEAR (D+E) 885,442,656 1,423 ,356,636. ITA.493& 669/BANG/2014 PAGE - 12 6.1 THE AR SUBMITTED THAT THE ASSESSEE HAD RS.142 .33 CRORES OF OPENING CASH AND CASH EQUIVALENTS AS THE FIRST DAY OF THE AY IE ON 01.04.2010 , SUBSTANTIAL OF SUCH SUM CAME FROM CA SH-FLOW GENERATED FROM / USED IN THE FINANCIAL ACTIVITIES, PARTICULARLY F ROM THE PROCEEDS OF ISSUE OF SHARES, DURING THE PERIOD ENDED 31.03.2009. THUS, HE SUBMITTED THAT THE ASSESSEE HAD SUFFICIENT NON-INTEREST BEARING FUND S AT ITS COMMAND TO MEET THE IMPUGNED INVESTMENTS IN SUBSIDIARY, FOR THE WOR K- IN- PROGRESS AND THE LOAN AND ADVANCES GIVEN TO ASSOCIATED CONCERNS. APART FROM THAT, HE RELIED ON THE FOLLOWING JUDGMENTS / DECISI ONS. I) MADRAS HIGH COURT DECISION IN REDINGTON (INDIA) LTD V. ADDL. CIT [TCA NO.520 OF 2016, DT.23.12.2016, WHEREIN IT IS H ELD THAT WHERE THERE IS NO EXEMPT INCOME IN RELEVANT YEAR, THERE C ANNOT BE A DISALLOWANCE OF EXPENDITURE U/S.14A TO ANY ASSUMED INCOME. II) THE DECISION OF GUJARAT HIGH COURT IN THE CASE OF CIT V. RAGHUVIR SYNTHETICS LTD (2013) 36 TAXMANN.COM 275, WHEREIN T HE HIGH COURT HELD THAT WHERE HUGE FUNDS WERE AVAILABLE WITHOUT A NY INTEREST LIABILITY WITH ASSESSEE AND THERE WAS NO EVIDENCE T O HOLD THAT BORROWED MONEY WAS UTILIZED FOR PURPOSES OF ADVANCE TO ITS SISTER CONCERNS, NO DISALLOWANCE OF INTEREST WAS WARRANTED . WE HEARD THE RIVAL SUBMISSIONS. WE HOLD THAT SECTIO N 14A IS APPLICABLE EVEN WHERE THE MOTIVE IN ACQUIRING THE SHARES WAS TO OBTAIN CONTROLLING INTEREST IN THE COMPANIES. THE QUESTION IN THIS CASE IS WHETHER INTEREST BEARING BORROWINGS WAS UTILIZED TO ACQUIRE SHARES IN THE COMPANY AND IN MAKING THE ADVANCES ETC. THE ASSES SEES SHARE CAPITAL AS ON 31.3 2010 WAS AT RS.9.16 CRORES (LAST YEAR (L Y)RS.9.16 CRORES) . ITS ITA.493& 669/BANG/2014 PAGE - 13 RESERVES & SURPLUS AS ON 31.3.2010 WAS AT RS.469.71 CRORES (LY RS.429.2416 CRORES). THUS, IT HAS RS.478.87 CRORES OF NON- INTEREST BEARING FUNDS. THE IMPUGNED INVESTMENTS IN THE SUBSIDIARY DURING THE YEAR WAS AT RS14.00 CRORES, THE INCREASE IN THE CLOSING WORK- IN- PROGRESS WAS AT RS. 10,08,07,321 AND THE LOAN AND ADVANCES GIVEN TO ASS OCIATED CONCERNS WAS AT RS.17.96 CRORES. THUS, THE TOTAL OF THEM WAS AT RS 42.04CRORES ONLY, WHICH IS MUCH LESSER THAN THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEEE. FURTHER, ITS LO AN FUNDS , BOTH SECURED AND UNSECURED, AS ON 31.3 2010 WAS AT RS.19 2.65 (LY RS.313.60 CRORES). THUS, THERE IS A REDUCTION IN ITS INTERES T BEARING LOAN BY RS.120.95 CRORES DURING THE YEAR. ON SUCH FACTS, THE INTEREST DISALLOWANCE MADE BY ASSESSING OFFICER ON SUCH ISSUES ARE UNWARRANTED AND HENCE CORRESPONDING REVENUES APPEAL GROUNDS ARE DISMISSED. THE NEXT IS SUE IS WHETHER THE INTEREST DISALLOWANCE MADE U/S. 14A RWR 8D2(III) IS JUSTIFIED . IN THIS REGARD, WE HAVE ALREADY NOTED THAT THE ASSESSEE MADE INVESTMENTS IN ITS SUBSIDIARY, DURING THE YEAR, AT RS. 14 CRORE AND HE NCE IT MUST HAVE INCURRED CERTAIN INDIRECT EXPENSES AS EXPLAINED BY THE CIT( A) IN HIS ORDER. IT IS AN UNDISPUTED FACT THAT DURING THE YEAR THE ASSESSEE H AS TAKEN A DECISION TO MAKE AN INVESTMENT IN THE SUBSIDIARY. THEREFORE, T HE EXPENDITURE INCURRED FOR TAKING SUCH DECISION WOULD FALL WITHIN THE CATE GORY OF EXPENDITURE INCURRED FOR EARNING THE EXEMPT INCOME AS PER SECTI ON 14A. EXCEPT THE INVESTMENT IN SUBSIDIARY, THERE IS NO OTHER INVESTM ENT. THEREFORE, FOR THE PURPOSE OF COMPUTING THE DISALLOWANCE AS PER RULE 8 D(2)(III), THE AMOUNT OF AVERAGE INVESTMENT WOULD BE RS.7 CRORES AND HENCE T HE DISALLOWANCE MADE ITA.493& 669/BANG/2014 PAGE - 14 AT 0.5% OF THE AVERAGE AMOUNT OF THE CURRENT YEAR I NVESTMENT OF RS.7 CRORES WOULD BE RESTRICTED TO RS.3,50,000/- ONLY. TO THIS EXTENT, THE DISALLOWANCE IS JUSTIFIED. THUS THE CORRESPONDING ASSESSEES GROUND FAILS. 07. ON THE DISALLOWANCE OF PROFESSIONAL EXPENSES AT RS.2,59,47,337, THE AR SUBMITTED THAT FROM THE DETAILS FURNISHED BY IT THE AO OBSERVED THAT OUT OF RS.4,29,51,841/- INCURRED TOWARDS PROFESSIONAL A ND CONSULTANCY EXPENDITURE, RS.2,59,43,337/- , IE MORE THAN 50% OF THE EXPENSES WERE, MADE ON PROVISIONAL BASES FOR WHICH NO DETAILS WER E FURNISHED; AND THAT THE ASSESSEE WAS UNABLE TO PROVE THE GENUINENESS OF THE EXPENDITURE AND HENCE DISALLOWED RS.2,59,43,337/-. DURING THE APPE AL PROCEEDINGS , THE APPELLANT EXPLAINED THAT THE PROFESSIONAL AND CONSU LTANCY CHARGES AT RS.2,59,47,337 WAS PAYABLE TO M/S. L. S. CABLE LTD, FOR RENDERING TECHNICAL ASSISTANCE FORLAYINGUNDER -GROUND CABLE, AS PER MER CANTILE SYSTEM. SINCE THE REVENUE WAS OFFERED FOR TAXATION, AS PER MATCHI NG PRINCIPLE, THE EXPENDITURE RELATING TO THE REVENUE REQUIRES TO BE BOOKED AND ACCORDINGLY, IT IS BOOKED AND FURNISHED COPIES OF INVOICES AND PAYMENT DETAILS. THE CIT(A) HELD THAT M/S L. S. CABLE LTD RAISED INVOIC E ON 26.04.2010 AND CORRESPONDINGLY PASSED JOURNAL ENTRIES IN THE BOOK S OF THE ASSESSEE ON 14.05.2010 AS SUCH THE LIABILITY CRYSTALLISED IN SU CCEEDING YEAR , HENCE THE CLAIM IS CONTINGENT LIABILITY , THEREFORE NOT DEDUC TIBLE IN THIS ASSESSMENT YEAR AND UPHELD THE DISALLOWANCE. SEEKING OUR ATTEN TION TO CLAUSE (IV) REVENUE RECOGNITION UNDER SIGNIFICANT ACCOUNTING POLICIES TO THE SCHEDULE TO THE ACCOUNTS , WHICH IS EXTRACTED AS UN DER : ITA.493& 669/BANG/2014 PAGE - 15 (IV) REVENUE RECOGNITION REVENUE FRONT OF GOODS IS RECOGNISED ON TRANSFER OF ALL SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP TO THE BUYER. THE AM OUNT RECOGNISED AS SALE IS EXCLUSIVE OF SALES TAX AND NET OF TRADE DIS COUNTS AND SALES RETURNS, SALES ARE PRESENTED BOTH GROSS AND NET OF EXCISE DU TY. REVENUES FROM LONG TERM CONTRACTS (ERECTION AND COM MISSIONING) ARE RECOGNIZED BASED ON THE PRINCIPLES LAID DOWN IN AS 7 - 'CONSTRUCTION CONTRACTS' ON THE PERCENTAGE OF COMPLETION METHOD, IN PROPORTION THAT THE CONTRACT COSTS INCURRED FOR WORK PERFORMED UP T O THE REPORTING DATE BEAR TO THE ESTIMATED TOTAL CONTRACT COSTS. CONTRAC T REVENUE EARNED IN EXCESS OF HI III RIG HAS BEEN REFLECTED UNDER ''OTH ER CURRENT ASSETS' AND BILLING ILL EXCESS OF CONTRACT REVENUE HAS BEEN REF LECTED UNDER ''CURRENT LIABILITIES' IN THE BALANCE SHEET. VARIATION IN CON TRACT WORK, CLAIMS AND INCENTIVE PAYMENTS ARE INCLUDED TO THE EXTENT THAT DICY HAVE BEEN AGREED WITH THE CUSTOMER. WHERE THE OUTCOME OF IT CONTRACT CANNOT BE ESTIMATED RELIABLY, CONTRACT REVENUE IS RECOGNISED TO THE EXTENT THAT CONTRACT COSTS INCURRED WILL BE RECOVERABLE. CONTRA CT COSTS ARC RECOGNISED AS EXENSES TILL THE PERIOD IN WHICH THEY ARE INCURRED. WHEN IT IS PROBABLE THAT THE TOTAL CONTRACT COSTS WILL EXCE ED TOTAL CONTRACT REVENUE, THE EXPECTED LOSS IS RECOGNISED AS AN EXPE NSE IMMEDIATELY. LIQUIDATED DAMAGES / PENALTIES ARE PROVIDED AS PER THE CONTRACT TERMS WHEREVER THERE IS A DELAYED DELIVERY ATTRIBUTABLE T O THE COMPANY. INTEREST IS RECOGNISED USING THE TIME PROPORTION BA SIS TAKING INTO ACCOUNT THE AMOUNT OUTSTANDING AND THE INTEREST RATE APPLIC ABLE. THE AR SUBMITTED THAT THE ASSESSE FOLLOWED, % COM PLETE CONTRACT METHOD, OFFERED THE CORRESPONDING REVENUE ON MATCHING PRINC IPLE AND HENCE PLEADED THAT THE ABOVE EXPENDITURE HAS TO BE ALLOWED. PER C ONTRA, THE DR SUPPORTED THE ORDER OF THE CIT(A). WE HEARD THE RIVAL SUBMISSIONS. THE ASSESSEE HA S CLEARLY MADE OUT A CASE IN ITS FAVOUR AND HENCE WE DIRECT THE A O TO ALLOW THIS CLAIM SUBJECT TO THE FOLLOWING VERIFICATION . WE FIND THA T SINCE THE AO DISALLOWED ITA.493& 669/BANG/2014 PAGE - 16 THIS EXPENSE AT THE THRESHOLD , HE HAS NOT EXAMINE D AS TO WHETHER THIS PROFESSIONAL EXPENSES SUFFERED TDS OR NOT. HENCE, T HE AO WOULD RE- EXAMINE THIS ISSUE AS PER THE REQUIREMENTS UNDER S EC 40 (A)(IA) AND DECIDE THE YEAR OF ALLOWANCE OF THIS EXPENSES IN AC CORDANCE WITH THAT PROVISION, AFTER AFFORDING DUE OPPORTUNITY TO THE A SSESSEE. THIS ISSUE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 08. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED AND THE REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH DAY OF MAY , 2017. SD/- SD/- (VIJAY PAL RAO) (S. JAYARAMAN) JUDICIAL MEMBER A CCOUNTANT MEMBER MCN* COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME TAX 4. THE COMMISSIONER OF INCOME TAX (A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER ASSISTANT REGISTRAR