M/s Splendid Aparna Projects (P) Limited, Secunderabad V. DCIT, Circle 3(2), Hyderabad

ITA 52/HYD/2012

• Counselvise Citation: 5222514 RSA 2012
• Duration Of Justice: 1 year(s) 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-10-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 16-01-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R LAXMAN
• Assessee Lawyers: K C DEVADAS
• Keywords: Opportunity of being heard; Earning of tax free income; Source of fund
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER ITA.NO.52/HYD/2012 ASSESSMENT YEAR 2008-2009 M/S. SPLENDID APARNA PROJECT (P) LTD. HYDERABAD PAN AAJCS0099P VS. DCIT, CIRCLE 3(2) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI K.C. DEVADAS FOR REVENUE : SHRI R. LAXMAN DATE OF HEARING : 03.10.2013 DATE OF PRONOUNCEMENT : 04.10.2013 ORDER PER SHRI B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT(A)-IV, HYDERABAD DATED 20-12-2011 FOR THE AS SESSMENT YEAR 2008-2009. THE ASSESSEE HAS RAISED 8 GROUNDS ON THE ISSUE OF DISALLOWANCE OF INTEREST OF RS.1,33,50,000/- PUR PORTEDLY UNDER SECTION 14A / 36(1)(III) OF THE I.T. ACT, 1961 BY TH E ASSESSING OFFICER AND CONFIRMED BY THE CIT(A). 2. BRIEFLY STATED, THE ASSESSING OFFICER NOTICED THA T ASSESSEE HAS EARNED MUTUAL FUND DIVIDEND INCOME OF RS. 79,70 ,914/- AND CLAIMED EXEMPTION. AS NO INVESTMENT WAS FOUND IN TH E BALANCE SHEET, THE ASSESSING OFFICER ASKED FOR DETAILS AND NOTICED THAT THE ASSESSEE HAS INVESTED AN AMOUNT OF RS. 49 CRORE S IN MUTUAL FUNDS AND ALSO REDEEMED THEM IN THE YEAR ITSELF. TH E ASSESSING OFFICER ASKED THE ASSESSEE TO STATE WHY EXPENDITURE A TTRIBUTABLE TO EARNING OF EXEMPT INCOME SHOULD NOT BE DISALLOWED . IT WAS SUBMITTED THAT THE ASSESSEE COMPANY HAS NOT INCURRE D ANY 2 ITA.NO.52/HYD/2012 M/S. SPLENDID APARNA PROJECT (P) LTD. HYDERABAD EXPENDITURE FOR EARNING INCOME AND BEING THE MUTUAL FUND INVESTMENT THE EXPENDITURE PERTAINING TO THE SAME WA S BORNE BY THE MUTUAL FUND AND THE DIVIDEND WAS DIRECTLY CREDIT ED TO THE BANK ACCOUNT. THE ASSESSING OFFICER, HOWEVER, DID N OT AGREE. HE NOTICED THAT ASSESSEE CLAIMED INTEREST LIABILITY OF RS.4,22,93,293/- DURING THE YEAR. HE WAS OF THE OPIN ION THAT HAD THE ASSESSEE NOT INVESTED IN MUTUAL FUNDS, THE FUND S WOULD HAVE BEEN AVAILABLE FOR CLEARING THE SECURED LOANS AND T HEREBY, REDUCTION OF INTEREST. THEREFORE, HE ARRIVED AT THE RATE OF INTEREST AT 12% ON THE INTEREST PAID ON SECURED LOANS AND ES TIMATED THE DISALLOWANCE AT RS.1,33,50,000/- ON INVESTMENT OF R S. 49 CRORES FOR A PERIOD OF 7 MONTHS. 3. AGGRIEVED BY THE SAID DISALLOWANCE, ASSESSEE PREF ERRED AN APPEAL BEFORE THE CIT(A) WHEREIN IT WAS SUBMITTED T HAT THE HUDCO HAS SANCTIONED SPECIFIC TERM LOAN OF RS. 35 C RORES ON 01.02.2007 AND SINCE THE SAME WAS NOT IMMEDIATELY RE QUIRED, AN AMOUNT OF RS. 22 CRORES WAS KEPT AS TERM DEPOSIT WI TH VYSYA BANK ON 05.02.2007, AN AMOUNT OF RS. 10 CRORES WAS ADVANCED AS SHORT TERM LOAN TO M/S. APARNA CONSTRUCTIONS ON INTEREST AND AN AMOUNT OF RS. 5 CRORES WAS ADVANCED TO M/S. SNP INFRASTRUCTURE BETWEEN 7/8 TH MARCH, 2007 AGAIN ON INTEREST. IT WAS FURTHER SUBMITTED BEFORE THE CIT(A) THAT ASSESS EE HAS INVESTED IN MUTUAL FUNDS FROM 27.07.2007 TO 29.02.2 008 AND IN BETWEEN ASSESSEE ALSO REDEEMED THE INVESTMENTS ON V ARIOUS DATES IN THE MONTH OF AUGUST, SEPTEMBER, OCTOBER AN D DECEMBER AND FINALLY THE ENTIRE AMOUNT ON 29.02.2008. VIDE AN NEXURE-4A TO THE WRITTEN SUBMISSIONS, ASSESSEE HAS EXPLAINED T HAT THE ASSESSING OFFICER OPINION OF INVESTING RS. 49 CRORE S IS NOT CORRECT AS THE ASSESSEE HAD INVESTED, AT ANY POINT OF TIME, MAXIMUM OF RS. 27.50 CRORES. WITH REFERENCE TO THE SOURCE OF F UNDS, THE ASSESSEE ENCLOSED DETAILED STATEMENT OF ANALYSIS OF INVESTMENT 3 ITA.NO.52/HYD/2012 M/S. SPLENDID APARNA PROJECT (P) LTD. HYDERABAD AND SOURCE OF FUNDS VIDE ANNEXURES 4B, 4C, 4D AND 4E TO SUBMIT THAT ASSESSEE HAS ITS OWN BUSINESS FUNDS I.E ., OWN SHARE CAPITAL, ADVANCES RECEIVED FROM CUSTOMERS AGGREGATI NG TO OVER RS. 72 CRORES WHICH WAS THE MAIN SOURCE OF INVESTME NT IN MUTUAL FUNDS. IT WAS SUBMITTED THUS, THE QUESTION O F MAKING DISALLOWANCE UNDER SEC.14A/36(1)(III) WAS WHOLLY UNS USTAINABLE. 4. THE LEARNED CIT(A), HOWEVER, AFTER EXTRACTING SOM E OF THE SUBMISSIONS IN THE ORDER REJECTED THE CONTENTIONS ON TWO REASONS THAT ASSESSEE HAS CHANGED ITS EXPLANATION, AS OBSERV ED IN PARA 6 OF THE ORDER, AND FURTHER THERE WAS HUGE TIME GAP B ETWEEN BORROWAL OF FUND AND INVESTMENT IN MUTUAL FUNDS WHI CH CANNOT BE ACCEPTED A GROUND FOR NOT INVOKING THE DISALLOWA NCE, AS IT IS FOR THE ASSESSEE TO EXPLAIN THE SOURCE OF FUNDS AND INVESTMENT. ULTIMATELY, AFTER ANALYSING VARIOUS CASE LAWS, HE AGR EED WITH THE CONCLUSION OF THE ASSESSING OFFICER THAT RELATABLE INTEREST EXPENDITURE WAS REQUIRED TO BE DISALLOWED. 5. DRAWING OUR ATTENTION TO THE PAPER BOOK FILED RU NNING FROM PAGES 1 TO 167 AND VARIOUS CASE LAW PAPER BOOK FILE D PAGES 1 TO 49 AND BRIEF SUMMARY, LEARNED COUNSEL FOR THE ASSESS EE, SUBMITTED THAT THE FUNDS WHICH WERE OBTAINED BY WAY O F LOAN FROM HUDCO WERE INVESTED IN TERM DEPOSITS ON WHICH INTEREST WAS EARNED DURING THE YEAR. APART FROM THAT ASSESSEE ALSO EARNED INTEREST FROM M/S. APARNA CONSTRUCTIONS AND SNP INF RASTRUCTURE AND THE TOTAL INTEREST EARNED ON TERM DEPOSITS AND ON CORPORATE LOANS WERE TO THE TUNE OF RS.1,46,71,794/- WHICH WA S OFFERED UNDER THE HEAD OTHER INCOME IN THE P & L ACCOUN T. IT WAS FURTHER SUBMITTED THAT BY ANNEXURE 4A TO 4D IT WAS EXP LAINED THAT THE SOURCE OF FUNDS WERE INTERNAL ACCRUALS AND NO PART OF BORROWED FUNDS WERE UTILISED IN INVESTING IN THE MU TUAL FUNDS. LEARNED COUNSEL FOR THE ASSESSEE, ALSO COUNTERED TH E 4 ITA.NO.52/HYD/2012 M/S. SPLENDID APARNA PROJECT (P) LTD. HYDERABAD OBSERVATIONS OF THE LEARNED CIT(A) ABOUT CHANGE OF EXPLANATION AS ALLEGED BY THE CIT(A), TO SUBMIT THAT ASSESSEE WAS C ONSISTENTLY EXPLAINING THAT THE ASSESSEE HAS INVESTED ONLY OWN FU NDS IN THE MUTUAL FUNDS AND NO PART OF THE BORROWED FUNDS WERE UTILISED FOR INVESTMENT. HE RELIED ON VARIOUS CASE LAW IN SUPPOR T OF CONTENTIONS. HOWEVER, HE FAIRLY ADMITTED THAT OUT OF THE INVESTMENTS MADE BY THE ASSESSEE COMPANY IN MUTUAL FU NDS, AN AMOUNT OF RS. 5 CRORES CAN BE CONSIDERED AS INVESTM ENT OUT OF THE BORROWED FUNDS FOR THE PERIOD FROM 27 TH JULY TO 14 TH AUGUST 2007 AND FURTHER AN AMOUNT OF RS. 12.5 CRORES FROM 28.01.2008 TO 29.02.2008, WHICH AT BEST CAN BE CONSIDERED FOR DISALLOWING THE INTEREST. 6. THE LEARNED D.R. ON THE OTHER HAND, RELIED ON TH E ORDERS OF THE ASSESSING OFFICER AND CIT(A) AND ALSO PLACED RE LIANCE IN THE CASE OF EVERPLUS SECURITIES & FINANCE LTD. VS. DCIT (2006) 101 ITD 151 (DEL.). FURTHER IT WAS SUBMITTED THAT THE O PENING BALANCE STATED TO BE IN ANNEXURE 4D COULD NOT BE VER IFIED. THEREFORE, DISALLOWANCE IS WARRANTED. 7. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE ORD ERS OF THE AUTHORITIES ALONG WITH PAPER BOOKS PLACED ON RE CORD. THE ORDER OF THE ASSESSING OFFICER CANNOT BE SUSTAINED BASICALLY AS HE HAS NEITHER EXAMINED THE NEXUS OF BORROWED FUNDS WITH THAT OF INVESTMENT MADE IN MUTUAL FUNDS, NOR HE HAS ARRIVED AT THE CORRECT INVESTMENT. WITHOUT NOTICING THE REDEMPTION S MADE, HE ARRIVED AT GROSS INVESTMENT OF RS. 49 CRORES, WHERE AS, AT ANY POINT OF TIME THE INVESTMENT WAS NOT MORE THAN RS. 27.50 CRORES. BE THAT AS IT MAY, THE WORKING OF INTEREST IS ALSO N OT ACCORDING TO THE FACTS ON RECORD. THEREFORE, WE ARE OF THE OPINI ON THAT THE DISALLOWANCE OF RS.1,33,50,000/- CANNOT BE SUSTAINE D. ASSESSEE IN FACT, EXPLAINED BEFORE THE CIT(A) THE DETAILS OF INVESTMENTS AND 5 ITA.NO.52/HYD/2012 M/S. SPLENDID APARNA PROJECT (P) LTD. HYDERABAD WITHDRAWALS, VIDE ANNEXURE 4A AND ALSO SOURCES OF FU NDS VIDE ANNEXURES 4B TO 4D, ALONG WITH THE ACCOUNT COPIES OF VARIOUS LEDGERS AS WELL AS THE ENTIRE ACCOUNT COPY OF THE AC COUNTS MAINTAINED WITH THE BANKS, TO JUSTIFY THE CONTENTIONS THAT NO BORROWED FUNDS WERE UTILISED. LEARNED CIT(A), DID N OT EXAMINE ANY OF THESE ISSUES BUT WENT ON TO CONFIRM THE ORDER OF THE ASSESSING OFFICER ON VARIOUS PRESUMPTIONS AND ALLEG ATIONS. AS SEEN FROM THE STATEMENT OF FACTS AS WELL AS THE DET AILS FURNISHED IN THE PAPER BOOK, THE ASSESSEE ALL ALONG CONTESTIN G ONLY ONE ISSUE THAT IT HAS ITS OWN BUSINESS FUNDS FOR INVEST MENT IN MUTUAL FUND AND NO PART OF BORROWED FUNDS WERE UTILISED/PL ACED. FURTHER, IT ALSO CONTENDED THAT THE AMOUNT OF INVES TMENT WAS NOT RS. 49 CRORES. IT ALSO EXPLAINED THAT IT HAS EARNED INTEREST ON THE TEMPORARY ADVANCEMENT OF FUNDS TO THE SISTER CONCERN S AND ALSO INVESTMENT IN TERM DEPOSITS WITH THE BORROWED FUNDS . IT ALSO EXPLAINED, FOR THE OBSERVATION OF THE ASSESSING OFFI CER THAT ASSESSEE COULD HAVE DISCHARGED SECURED LOAN THAT TH E SAME CANNOT BE ACCEPTED ON COMMERCIAL PRINCIPLES AS THE LOANS WERE SANCTIONED WITH PRE-DETERMINED REPAYMENT SCHEDULE, W HICH THE ASSESSEE HAS TO ADHERE IN ORDER TO GET FURTHER CRED IT FACILITIES. THEREFORE, EVEN IF IT HAS OWN FUNDS, IT CANNOT REPA Y THE LOAN DUE TO BUSINESS EXPEDIENCIES. THESE ASPECTS WERE NEITHER EXAMINED BY THE CIT(A) NOR COMMENTED UPON BUT WENT ONTO CONFI RM DISALLOWANCES ON CERTAIN LEGAL PRINCIPLES WHICH, IN OUR OPINION, ARE NOT APPLICABLE TO THE FACTS OF THE CASE. IN FAC T, WE ARE ALSO NOT SURE WHETHER THE DISALLOWANCE IS UNDER SECTION 14A (AS NO ADMINISTRATIVE EXPENDITURE DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER) OR UNDER SECTION 36(1)(III) (NO FINDING WAS GIVEN THAT THE FUNDS WERE NOT UTILISED FOR BUSINESS PURPO SES). WITHOUT SPECIFYING UNDER WHAT PROVISIONS OF THE ACT, THE DIS ALLOWANCES WAS MADE BOTH THE AUTHORITIES SIMPLY WENT ON TO DISA LLOW AN 6 ITA.NO.52/HYD/2012 M/S. SPLENDID APARNA PROJECT (P) LTD. HYDERABAD AMOUNT OF RS.1,33,50,000/- AGAINST THE DIVIDEND INC OME OF RS.79,70,914/-. 8. WE HAVE EXAMINED THE INVESTMENT PATTERN AND SOURC E OF FUNDS. THE INVESTMENTS MADE BY THE ASSESSEE AS GIVEN IN ANNEXURE 4A ARE AS FOLLOWS : 4A M/S.SPLENDIT APARNAPROIECTS (P) LTD INVESTMENTS MADE IN ING LIQUID PLUS MUTUAL FUND SCHEME DURING THE PERIOD 27.7.2007 TO 18.2.2008 S. NO. DATE OF INVESTMENT IN MUTUAL FUNDS DEPOSITS WITHDRAWALS NET 1. 27.7.2007 11,00,00,000 11,00,00,000 2. 28.7.2007 3,00,00,000 14,00,00,000 3. 2.8.2007 7,50,00,000 21,50,00,000 4. WITHDRAWAL OF M.F. ON 14.8.2007 5,00,00,000 16,50,0 0,000 5. 17.8.2007 4,50,00,000 21,00,00,000 AS ON 31.8.2007 26,00,00,000 5,00,00,000 21,00,00,000 6. 25.9.2007 - WITHDRAWAL 1,00,00,000 20,00,00,000 7. 12.10.2007 1,50,00,000 21,50,00,000 8. 23.10.2007 - WITHDRAWAL 1,50,00,000 20, 00,00,000 9. 13.11.2007 1,00,00,000 21,00,00,000 10. 22.11.2007 1,00,00,000 22,00,00,000 11. 28.11.2007 1,50,00,000 23,50,00,000 12. 13.12.2007 - WITHDRAWAL 3,00,00,000 20,50,00,000 13. 28.12.2007 - WITHDRAWAL 11,00,00,000 9,50,00,0 00 14. 21.1.2008 3,00,00, 000 12,50,00,000 15. 28.1.2008 12,00,00,000 24,50,00,000 16. 30.1.2008 1,00,00,000 25,50,00,000 17. 11.2.2008 1,00,00,000 26,50,00,000 18. 18,2,2008 1,00,00,000 27,50,00,000 19. 29.2.2008 27,50,00,000 NIL 9. THE FIRST INVESTMENT OF RS. 21.50 CRORES WAS MAD E BETWEEN THE PERIOD FROM 27.07.2007 TO 02.08.2007. HOWEVER, IN ANNEXURE 7 ITA.NO.52/HYD/2012 M/S. SPLENDID APARNA PROJECT (P) LTD. HYDERABAD 4B, THE ASSESSEE EXPLAINED INVESTMENT TO THE TUNE O F RS.17.24 CRORES OUT OF WHICH AN AMOUNT OF RS. 10 CRORES WAS OUT OF THE CURRENT ACCOUNT OF VYSYA BANK, IN WHICH REPAYMENT OF L OAN ADVANCED TO APARNA CONSTRUCTIONS ON 05.02.2007 WAS CREDITED. THUS, THERE IS A NEXUS BETWEEN THE BORROWED FUND TO THAT OF INVESTMENT IN MUTUAL FUND. IT WAS THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE, THAT ONLY 50% OF THE ABOVE AMOUNT CAN BE CONSIDERED AS THE ASSESSEE HAS OTHER FUNDS. HOWE VER, AS SEEN FROM THE SCHEDULE, ASSESSEE HAS EXPLAINED ONLY SOURCE OF RS. 17.24 CRORES WHEREAS THE INITIAL INVESTMENT WAS RS. 21.50 CRORES. BALANCE OF THE FUNDS ON VARIOUS OTHER INVESTMENTS W ERE STATED TO BE OUT OF PROJECT RECEIPTS, EXCEPT INVESTMENT ON 28 TH JANUARY TO THE EXTENT OF RS. 12 CRORES WHICH HAS DIRECT SOURCE FROM THE TERM DEPOSITS MATURED, WHICH ITSELF WAS A DEPOSITE FROM THE BORROWED FUNDS. THEREFORE, PARTIALLY AGREEING WITH THE CONTEN TION OF THE LEARNED COUNSEL FOR THE ASSESSEE, PROPORTIONATE INT EREST FOR THE PART PERIOD WHERE THE BORROWED FUNDS WERE UTILISED FOR INVESTMENT CAN ONLY BE DISALLOWED. THIS ASPECT OF TH E DISALLOWANCE REQUIRES VERIFICATION BY THE ASSESSING OFFICER. ASSESSING OFFICER IS DIRECTED TO EXAMINE THIS ASPECT AND RESTRICT THE DISALLOWANCE TO THE PERIOD FOR WHICH THE BORROW ED FUNDS WERE UTILISED FOR INVESTMENT. AS ASSESSEE HAS EARNED INT EREST ON DEPOSITS WHICH WAS ALSO ACCEPTED INCOME, NO FURTHER DISALLOWANCE CAN BE MADE UNDER SECTION 36(1)(III) O R UNDER SECTION 14A, OTHER THAN WHAT WAS CONSIDERED IN THE ASSESSMENT ORDER. WITH THESE OBSERVATIONS, WE REMIT THE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO WORK-OUT THE DISALLOWANCE ACCORDINGLY. CASE LAW RELIED UPON BY THE ASSESSEE AND D.R. COULD NOT BE REITERATED HERE AS THE DIRECTION IS TO EXAMINE ON FA CTS AND THEREFORE, WE ARE OF THE OPINION THAT IT IS NOT NEC ESSARY TO REPEAT THE VARIOUS PRINCIPLES ON THE ISSUE. WE ALSO MAKE I T CLEAR THAT 8 ITA.NO.52/HYD/2012 M/S. SPLENDID APARNA PROJECT (P) LTD. HYDERABAD THE ASSESSEE SHOULD BE GIVEN REASONABLE OPPORTUNITY OF BEING HEARD WHILE DECIDING THE MATTER. ACCORDINGLY, WE ALL OW THE GROUNDS RAISED AND RESTORE THE ISSUE TO THE FILE OF ASSESSING OFFICER. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 04.10.2013 SD/- SD/- - (P.MADHAVI DEVI) JUDICIAL MEMBER - (B.RAMAKOTAIAH) ACCOUNTANT MEMBER HYDERABAD, DATED 04 TH OCTOBER, 2013 VBP/- COPY TO 1. M/S. SPLENDID A PARNA PROJECT (P) LTD., PLOT NO.203, REGENCY HOUSE, 680, SOMAJIGUDA, HYDERABAD-082 C/O. M/S. SEKHAR & CO. C.AS. 133/4, RASHTRAPATHI ROAD, SECUNDERABAD. 2. DCIT, C IRCLE 3(2), 7 TH FLOOR, I.T. TOWERS, HYDERABAD. 3. CIT(A) - I V , HYDERABAD. 4. CIT - III , HYDE RABAD 5. DR A BENCH, ITAT, HYDERABAD