M/s Bharat Marketing & Advertising Co. PVT. lTD., Delhi V. ITO, New Delhi

ITA 5003/DEL/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6900 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-01-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC 1
• Next Hearing Date: 20-12-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 21-09-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: R K KAPOOR
• Keywords: Wholly owned subsidiary; Commercial expediency
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH SMC-I, NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER ITA NO.5003/DEL/2016 ASSESSMENT YEAR : 2011-12 BHARAT MARKETING & ADVERTISING CO. PVT. LTD., 391, 2 ND FLOOR, ZAKIR NAGAR, DELHI. VS. ITO, WARD- 2(4), NEW DELHI. PAN : AAACB 0049 H (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI R. K. KAPOOR, CA RESPONDENT BY : SHRI N. K. BANSAL, SR.DR DATE OF HEARING : 20-12-2016 DATE OF PRONOUNCEMENT : 27-01-2017 O R D E R PER S.V. MEHROTRA, A.M : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER DATED 23.06.2016 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)-2, NEW DELHI, U/S 143(3) OF THE INCOME TAX ACT, 1961 (IN S HORT THE ACT) RELATING TO ASSESSMENT YEAR 2011-12. 2. BRIEF FACTS OF THE CASE ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY WAS WORKING AS AN ADVERTISING AGEN CY. IT HAD FILED ITS RETURN DECLARING INCOME AT RS.10,14,220/-. THE ASS ESSING OFFICER NOTICED THAT ASSESSEE HAD SHOWN INVESTMENT TO THE TUNE OF R S.1,59,15,975/- OUT OF WHICH AN AMOUNT OF RS.1,58,60,459/- WAS INVESTED IN SHARES OF UNQUOTED COMPANY. HE NOTED THAT ASSESSEE HAD ALSO RECEIVED DIVIDEND INCOME. HE, 2 ITA NO.5003/DEL/2016 THEREFORE, SHOW-CAUSED THE ASSESSEE AS TO WHY EXPEN SES MAY NOT BE DISALLOWED U/S 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962. THE ASSESSEE IN ITS REPLY POINTED OUT THAT I T HAD EARNED ONLY A DIVIDEND INCOME OF RS.21.71 DURING THE YEAR UNDER R EFERENCE, WHICH WAS INCLUDED IN ITS TAXABLE INCOME. NO OTHER EXEMPTED INCOME WAS EARNED BY THE ASSESSEE AND THE COMPANY HAD NOT INCURRED ANY E XPENDITURE FOR EARNING THE EXEMPTED INCOME, WHICH COULD BE ATTRIBUTED DIRE CTLY OR INDIRECTLY FOR MAKING TAX FREE INVESTMENT DURING THE YEAR. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS, THE ASSESSING OFFICER MADE A DISALLOWANCE OF RS.1,44,858/-. 3. THE ASSESSING OFFICER FURTHER NOTICED THAT ASSES SEE COMPANY HAD BORROWED A SUM OF RS.33,24,145.37 ON WHICH IT WAS P AYING TOTAL INTEREST OF RS.3,02,185/-. HE FURTHER NOTICED THAT THE ASSESSE E HAD GIVEN INTEREST FREE LOAN AMOUNTING TO RS.55,21,144.85/- AS PER DETAILS GIVEN HEREINBELOW :- S.NO. NAME OF THE COMPANY AMOUNT 1. MEDIA COVERAGE PVT. LTD. (WHOLLY OWNED SUBSIDIARY) 42,45,509.85 2. MMB SALES INDIA PVT. LTD. 5,70,000.00 3. UNIGLOBE MOD TRAVELS PVT. LTD. 79,764.00 4. UNIGLOBE TRAVEL SOUTH ASIA PVT. LTD. 6,25,871. 00 TOTAL 55,21,144.85 4. HE, THEREFORE, SHOW-CAUSED THE ASSESSEE AS TO WH Y THE PROPORTIONATE EXPENSES INCURRED FOR INTEREST PAID ON BORROWED CAP ITAL MAY NOT BE 3 ITA NO.5003/DEL/2016 DISALLOWED AS THE ASSESSEE COMPANY HAD GIVEN INTERE ST FREE ADVANCES/ LOANS TO OTHERS. THE ASSESSEE, INTER-ALIA, REPLIED AS UNDER :- MEDIA COVERAGE PVT. LTD. A WHOLLY OWNED SUBSIDIARY OF THE ASSESSEE COMPANY WAS ALSO CARRYING OUT ADVERTISING ACTIVITIE S SINCE ITS INCORPORATION IN MARCH, 1997. IT HAS CARRIED OUT A MAJOR CAMPAIGN FOR AQUATECH INTERNATIONAL LTD., JAIPUR BUT AS THE PRODUCT FAILE D TO CLICK IN THE MARKET IT INCURRED HEAVY LOSSES AS THE CLIENT DID NOT PAY FOR THE SERVICES. SINCE IT WAS SUBSIDIARY OF THE ASSESSEE COMPANY, THE COMPANY HAD TO ADVANCE MONEY FOR MAKING THE PAYMENTS TO ITS SUPPLIERS OUT OF THE SUR PLUS FUNDS LYING IDLE AND NO FUNDS WERE BORROWED FOR THE SAME. THE ASSESSING OFFICER DID NOT ACCEPT THE ASSESSEES CONTENTIONS AND MADE A DISALLOWANCE OF RS.2,27,157/-. 5. LD. CIT(A) CONFIRMED THE ASSESSING OFFICERS ACT ION. BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRI BUNAL AND HAS TAKEN FOLLOWING GROUNDS :- 1.0 THAT THE ORDER OF ASSESSMENT PASSED BY THE AO AND UPHELD BY HON'BLE CIT(A) IS BAD IN LAW. 2.0 THAT THE HON'BLE CIT(A) HAS ERRED IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE ASSESSEE'S CASE IN UPHOLDING T HE DISALLOWANCE OF RS.1,44,858/- ON ACCOUNT OF SEC 14A READ WITH RULE 8D. 3.0 THAT THE HON'BLE CIT(A) HAS ERRED IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE ASSESSEE'S CASE IN NOT APPRECI ATING THAT THE DIVIDEND INCOME OF RS.21.71/- HAS BEEN RECEIVED ON INVESTMENT OF ON LY RS.2,418/-. 4.0 THAT THE HON'BLE CIT(A) HAS ERRED IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE ASSESSEE'S CASE IN NOT RESTRIC TING THE DISALLOWANCE TO THE EXTENT OF DIVIDEND INCOME RECEIVED DURING THE YEAR UNDER CONSIDERATION. 5.0 THAT THE HON'BLE CIT(A) HAS ERRED IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE ASSESSEE'S CASE IN NOT APPRECI ATING THE FACT THAT ASSESSEE IS NOT IN INVESTMENT BUSINESS AND HAS MADE STRATEGIC I NVESTMENT FOR COMMERCIAL REASONS. 6.0 THAT THE HON'BLE CIT(A) HAS ERRED ON FACTS IN A LLEGING THAT THE ASSESSEE HAS SPENT RESOURCES AND EXPERTISE FOR INVESTMENT DE CISIONS AND HAS INCURRED EXPENDITURE ON SALARIES AND OTHER ADMINISTRATIVE EX PENSES FOR THE SAME. 4 ITA NO.5003/DEL/2016 7.0 THAT THE LD. CIT(A) HAS ERRED IN LAW IN RELYING ON CBDT CIRCULAR WHICH HAS BEEN INTERPRETED BY HON'BLE DELHI HC IN VARIOUS DECISIONS AND HELD THE PRINCIPLE THAT NO DIVIDEND NO DISALLOWANCE. 8.0 THAT THE HON'BLE CIT(A) HAS MADE ERRONEOUS INTE RPRETATION OF SECTION 36(1)(III). 9.0 THAT THE HON'BLE CIT(A) HAS ERRED IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE ASSESSEE'S CASE IN UPHOLDING T HE DISALLOWANCE OF INTEREST EXPENSE OF RS. 2,27,157/- ON NOTIONAL BASIS ON THE BASIS OF CONJECTURES, SURMISES AND ASSUMPTIONS. 10.0 THAT THE HON'BLE CIT(A) HAS ERRED IN LAW AND O N FACTS OF THE ASSESSEE'S CASE IN UPHOLDING THAT THE ASSESSEE HAS GIVEN INTER EST FREE ADVANCES OUT OF BORROWED FUNDS, WITHOUT ESTABLISHING ANY NEXUS BETW EEN THE TWO. 11.0 WITHOUT PREJUDICE TO GROUND 10, THE HON'BLE CI T(A) HAS ERRED IN LAW IN NOT APPRECIATING THAT SUPPORTING THE BUSINESS OF SU BSIDIARY COMPANIES IS A MATTER TO COMMERCIAL EXPEDIENCY FOR A HOLDING COMPANY AND ADVANCES GIVEN ARE VERY MUCH IN THE NATURE OF BUSINESS PURPOSE. PRAYER THE APPELLANT-ASSESSEE PRAYS THAT THE RELIEF AS PER GROUNDS OF APPEAL ABOVE MAY KINDLY BE ALLOWED TO IT AND THE APPELLANT MAY ALSO BE ALLOWED TO ADD, DELETE, AMEND OR SUBSTITUTE ANY GROUND(S) OF APPEAL EITHER AT OR BEFORE THE DATE OF HEARING. 6. APROPOS GROUND NOS.2 TO 7, LD. COUNSEL POINTED O UT THAT THE DIVIDEND INCOME OF RS.21.71 WAS NOT CLAIMED AS EXEMPT BY ASS ESSEE IN ITS COMPUTATION OF INCOME AND, THEREFORE, NO DISALLOWAN CE CAN BE MADE. ALTERNATELY, LD. COUNSEL SUBMITTED THAT IN VIEW OF THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENTS P VT. LTD. VS. CIT, (2015) 372 ITR 694 (DELHI), THE DISALLOWANCE CANNOT EXCEED THE DIVIDEND INCOME RECEIVED BY THE ASSESSEE. 7. I HAVE CONSIDERED THE RIVAL SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. THE SUBMISSIONS OF LD. COUNSEL THAT SINCE IT DID NOT CLAIM ITS INCOME AS EXEMPT IN ITS COMPUTATI ON OF INCOME, SECTION 5 ITA NO.5003/DEL/2016 14A IS NOT APPLICABLE, IS DEVOID OF ANY MERIT BECAU SE COMPUTATION OF INCOME HAS TO BE MADE AS PER LAW AND NOT AS PER THE WHIMS AND CONVENIENCES OF ASSESSEE. EVEN IF, ASSESSEE HAS NO T DONE COMPUTATION AS PER THE PROVISIONS OF THE ACT THEN IT IS FOR THE AS SESSING OFFICER TO MAKE THE NECESSARY CORRECTIONS BUT, IN ANY VIEW OF THE MATTE R, INCOME HAS TO BE CORRECTLY COMPUTED AS PER THE PROVISIONS OF THE ACT . HOWEVER, ALTERNATE CONTENTION OF LD. COUNSEL FOR THE ASSESSEE, RELYING ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENTS P VT. LTD. (SUPRA), DESERVES TO BE ACCEPTED AND THE DISALLOWANCE HAS TO BE RESTR ICTED ONLY TO THE DIVIDEND INCOME OF RS.21.71. I DIRECT ACCORDINGLY. IN THE RESULT, THE GROUND NOS.2 TO 7 ARE PARTLY ALLOWED. 8. APROPOS GROUND NO.8, LD. COUNSEL POINTED OUT THA T LOANS WERE GIVEN IN ASSESSMENT YEAR 1997-98 TO SUBSIDIARY COMPANIES CON SIDERING BUSINESS EXPEDIENCY AND NEED OF THE BUSINESS OUT OF FREE RES ERVES. HE FURTHER POINTED OUT THAT THE LOANS WERE TAKEN BY THE ASSESSEE COMPA NY DURING THE PREVIOUS YEARS I.E. ASSESSMENT YEARS 2009-10 AND 2010-11 FOR BUSINESS NEEDS AND NOT FOR GIVING INTEREST FREE LOANS. HE SUBMITTED THAT THE MATTER MAY BE RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER TO EXAMIN E THE FACTS AFRESH IN THE LIGHT OF DECISION OF HONBLE DELHI HIGH COURT IN TH E CASE OF CIT VS. MODI RUBBER LTD., (2015) 378 ITR 128 (DELHI). 6 ITA NO.5003/DEL/2016 9. I HAVE CONSIDERED THE RIVAL SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. THE FACTS NEED TO BE RE-MARSHALED IN THE LIGHT OF DECISION OF HONBLE DELHI HIGH COURT IN TH E CASE OF MODI RUBBER LTD. (SUPRA). I, THEREFORE, RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR DE-NOVO ADJUDICATION. IN THE RESULT, THIS GROUND NO.8 IS ALLOWED FOR STATISTICAL PURPOSES. 10. RESULTANTLY, THE APPEAL OF THE ASSESSEE IS PART LY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 27 TH DAY OF JANUARY, 2017. SD/- (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED : 27-01-2017. SUJEET COPY OF ORDER TO: - 1) THE APPELLANT 2) THE RESPONDENT 3) THE CIT 4) THE CIT(A)- 5) THE DR, I.T.A.T., NEW DELHI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, NEW DELHI