Forbes Campbell Finance Ltd., CHENNAI V. DCIT, CHENNAI

ITA 56/CHNY/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7690 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 2 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-03-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 27-01-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 07-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR B NISCHAL
• Keywords: Earning of tax free income; Wholly owned subsidiary; Revised return
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , D B ENCH, CHENNAI . , . , $ % BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ( . / I.T.A.NO.56/MDS/2014 ( / ASSESSMENT YEAR : 2009-10 ) M/S. FORBES CAMPBELL FINANCE LTD. THE CATHOLIC CENTRE, 108, ARMENIAN STREET, 1 ST FLOOR, CHENNAI-600 001. VS DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-II(1), CHENNAI. PAN:AAACL0532H ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. S.P.CHIDAMBARAM, ADVOCATE /RESPONDENT BY : DR.B.NISCHAL, JCIT /DATE OF HEARING : 27 TH JANUARY, 2016 /DATE OF PRONOUNCEMENT : 29 TH MARCH, 2016 / O R D E R PER A. MOHAN ALANKAMONY, AM: THIS APPEAL IS FILED BY THE ASSESSEE AGGRIEVED BY T HE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS, CHENNAI DATED 24.10.2013 IN ITA NO.511/2013-14 PAS SED UNDER SECTION 143(3) OF THE ACT. 2. THE ONLY GROUND RAISED BY THE ASSESSEE IN ITS AP PEAL IS THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) HAS ERRED IN SUSTAINING THE DISALLOWANCE OF ` 13,25,485/- MADE BY THE ASSESSING OFFICER INVOKING SECTION 14A READ WITH RULE 8D OF THE RULES. 2 ITA NO.56/MDS/2014 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY FORMERLY KNOWN AS LATHAM INDIA LTD., FILED ITS RETU RN OF INCOME FOR THE ASSESSMENT YEAR 2009-10 ON 29.09.2009 ADMIT TING INCOME OF ` 1,67,27,384/-. SUBSEQUENTLY BY THE ORDER OF MADRAS HIGH COURT DATED 30.06.2009, THE SAID COMPAN Y WAS AMALGAMATED WITH THE FORBES FINANCE LTD., AND THERE AFTER FILED ITS REVISED RETURN ON 16.06.2010 DECLARING IN COME OF ` 1,73,07,670/- AFTER CLAIMING SET OFF OF BROUGHT FOR WARD LOSS FROM THE ASSESSMENT YEAR 2001-02. THE CASE WAS SELE CTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) WAS IS SUED AND IN RESPONSE, THE ASSESSEE HAS FURNISHED THE DETAILS CALLED FOR. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE LEARNED ASSESSING OFFICER INVOKED THE PROVISIONS O F SECTION 14A READ WITH RULE 8D, AND WORKED OUT THE EXPENSES ATTRIBUTABLE FOR EARNING EXEMPT INCOME AT ` 13,25,485/- IN REGARD TO MANAGERIAL REMUNERATION / ROUTINE EXPEND ITURE AND DISALLOWED THE SAME. ON APPEAL, THE LEARNED COMMIS SIONER OF INCOME TAX APPEALS) SUSTAINED THE DISALLOWANCE M ADE BY THE ASSESSING OFFICER AGAINST WHICH THE ASSESSEE IS IN APPEAL BEFORE US. 3 ITA NO.56/MDS/2014 4. AT THE OUTSET, LEARNED AR SUBMITTED BEFORE US THAT ALL THE INVESTMENTS WERE MADE IN SISTER COMPAN Y OF THE ASSESSEE AND THEREFORE SECTION 14A OF THE AC T WILL NOT BE APPLICABLE IN THE CASE OF THE ASSESSEE. IT WAS THEREFORE PLEADED THAT THE ADDITION MADE FOR ` 13,25,485/- MAY BE DELETED. 5. LEARNED DR, ON THE OTHER HAND, RELIED ON THE ORDERS OF THE REVENUE. 6. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PERUSED THE MATERIALS AVAILABLE ON RECORD. IT IS NORMAL PRACTICE TO MAKE INVESTMENT IN SISTER COMPANIES DUE TO COMMERCIAL EXIGENCIES. WHILE DOING SO, IT IS OBVIOUS THAT THE ASSESSEE HAS NO OCCASION TO INCUR ANY EXPENDITURE OTHER THAN INTERE ST EXPENDITURE WHEN SUCH INVESTMENTS ARE MADE BY UTILIZING INTEREST BEARING FUNDS. IN THE CASE OF TH E ASSESSEE, IT IS SUBMITTED THAT NO INTEREST COST WAS INCURRED AS THE ENTIRE INVESTMENTS WERE MADE OUT OF ITS OWN INTEREST FREE FUNDS. FURTHER IN THE DECISIO N OF THE CHENNAI BENCH OF THE TRIBUNAL IN ITA 4 ITA NO.56/MDS/2014 NO.115/MDS/2015 DATED 06.01.2016, EXTRACTED HEREIN BELOW; IT HAS BEEN HELD THAT SECTION 14A OF THE ACT WILL NOT BE APPLICABLE WHEN INVESTMENTS ARE MADE IN SISTER COMPANIES. 5. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PERUSED THE MATERIALS AVAILABLE ON RECORD. ON THE IDENTICAL ISSUE AS POINTED OUT BY THE LD. A.R. THE CHENNAI BE NCH OF THE TRIBUNAL IN ITA NO.156/MDS/2013 VIDE ORDER DATE D 20/08/13 FOR THE ASSESSMENT YEAR 2009-10 HAS REMITT ED BACK THE MATTER TO THE LD. ASSESSING OFFICER TO DEC IDE THE MATTER ONCE AGAIN AFRESH BASED ON THE FINDINGS WHET HER THE ASSESSEE HAD ACTUALLY INCURRED ANY EXPENDITURE IN E ARNING THE DIVIDEND INCOME. THE RELEVANT PORTION OF THE OR DER IS EXTRACTED HEREIN BELOW FOR REFERENCE:- FURTHER, ON THE IDENTICAL ISSUE VARIOUS BENCHES OF THE TRIBUNAL AND THE HONBLE BOMBAY HIGH COURT HAVE HEL D AS FOLLOWS:- I) GARWARE WALL ROPES LTD., VS. ACIT REPORTED IN (2014) 65 SOT 086 (MUM.) HELD AS FOLLOWS:- WHEN ASSESSEE HAS PRIMA FACIE BROUGHT OUT CASE THA T NO EXPENDITURE HAS BEEN INCURRED FOR EARNING INCOME, W HICH DOES NOT FORM PART OF TOTAL INCOME, THEN IN ABSENCE OF ANY FINDING THAT EXPENDITURE HAS BEEN INCURRED FOR EARN ING EXEMPT INCOME PROVISIONS 14A CANNOT BE APPLIED.. II) INTEGLOBE ENTERPRIESES LTD., VS. DCIT REPOTED IN (2014) 40 CCH 0022(DEL. TRIB.) HELD AS FOLLOWS:- NO DISALLOWANCE OF INTEREST IS REQUIRED TO BE MADE UNDER RULE 8D(I) & 8D(II) WHERE NO DIRECT OR INDIRECT INT EREST EXPENDITURE WAS INCURRED FOR MAKING INVESTMENTS. WHERE THE ASSESSEE HAD UTILIZED INTEREST FREE FUNDS FOR MAKING FRESH INVESTMENTS AND THAT TOO INTO ITS SUBS IDIARIES, WHICH WAS NOT FOR THE PURPOSE OF EARNING EXEMPT INC OME AND WHICH WAS FOR STRATEGIC PURPOSES ONLY, NO DISALLOWA NCE OF INTEREST WAS REQUIRED TO BE MADE UNDER RULE 8D(I) & 8D(II) AND STRATEGIC INVESTMENT HAS TO BE EXCLUDED FOR PUR POSE OF ARRIVING AT DISALLOWANCE UNDER RULE 8D(III). 5 ITA NO.56/MDS/2014 III) M/S.JM FINANCIAL LTD., VS. ACIT REPORTED IN 2 014- TIOL-202-ITAT-MUM HELD AS FOLLOWS: THE DEPARTMENT HAS NOT DISPUTED THIS FACT OUT OF THE TOTAL INVESTMENT ABOUT 98% OF THE INVESTMENT ARE IN SUBSI DIARY COMPANIES OF THE ASSESSEE AND, THEREFORE, THE PURPO SE OF INVESTMENT IS NOT FOR EARNING THE DIVIDEND INCOME B UT HAVING CONTROL AND BUSINESS PURPOSE AND CONSIDERATION. TH E ASSESSEE HAS BROUGHT OUT A CASE TO SHOW THAT NO EXPENDITURE HAS BEEN INCURRED FOR MAINTAINING THE 9 8% OF THE INVESTMENT MADE IN THE SUBSIDIARY COMPANIES, THEREF ORE, IN THE ABSENCE OF ANY FINDING THAT ANY EXPENDITURE HAS BEEN INCURRED FOR EARNING THE EXEMPT INCOME, THE DISALLO WANCE MADE BY THE ASSESSING OFFICER IS NOT JUSTIFIED, ACC ORDINGLY THE SAME IS DELETED. (IV) CIT VS. BHARTI TELEVENTURE LTD. REPORTED IN (2 011) 331 ITR 0502. WHERE THE ASSESSEE WAS FOUND TO BE HAVING ADEQUATE NON-INTEREST BEARING FUND BY WAY OF SHARE CAPITAL A ND RESERVES AND THERE WAS NO NEXUS BETWEEN THE BORROWA LS OF ASSESSEE AND THE ADVANCES GIVEN, NO DISALLOWANCE FO R INTEREST WAS CALLED FOR . (V) CIT VS. RELIANCE UTILITIES & POWER LTD., REPOR TED IN (2009) 313 ITR 0340(BOM.) HAS HELD AS FOLLOWS:- TRIBUNAL HAVING RECORDED A CLEAR FINDING THAT THE ASSESSEE POSSESSED SUFFICIENT INTEREST-FREE FUNDS OF ITS OWN WHICH WERE GENERATED IN THE COURSE OF THE RELEVANT FINANC IAL YEAR, APART FROM SUBSTANTIAL SHAREHOLDERS FUND, PRESUMPTI ON STANDS ESTABLISHED THAT THE INVESTMENTS IN SISTER C ONCERNS WERE MADE BY THE ASSESSEE OUT OF INTEREST FREE FUND S AND THEREFORE NO PART OF INTEREST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WERE MADE OUT OF INTEREST BEARING FUNDS. (VI) EIH ASSOCIATED HOTELS LTD VS. DCIT REPORTED I N 2013- TIOL-796-ITAT-MAD . THE INVESTMENTS MADE BY THE ASSESSEE IN THE SUBSIDIARY COMPANY ARE NOT ON ACCOUNT OF INVESTMENT FOR EARNING CAPITAL GAINS OR DIVIDEND INCOME. SUCH INVE STMENTS HAVE BEEN MADE BY THE ASSESSEE TO PROMOTE SUBSIDIAR Y COMPANY INTO THE HOTEL INDUSTRY. THE ASSESSEE IS N OT INTO THE BUSINESS OF INVESTMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. ANY DIVIDEND EARNED BY THE ASSESSEE FROM INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENTAL. THEREFORE THE INVESTMENT MADE BY THE ASSESSEE IN ITS SUBSIDIARY I S NOT TO 6 ITA NO.56/MDS/2014 BE RECKONED FOR DISALLOWANCE U/S.14A R.W.R.8D. THE ASSESSING OFFICER IS DIRECTED TO RE-COMPUTE THE AVE RAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DELETING INVESTMENTS MADE BY THE ASSESSEE IN SUBSID IARY COMPANY. TAKING NOTE OF THE ABOVE DECISIONS AND THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN IT A NO.156/MDS/13 CITED SUPRA, WE HEREBY REMIT THE MATT ER BACK TO THE FILE OF LD. ASSESSING OFFICER TO EXAMIN E THE ISSUE INVOLVED IN THIS CASE AFRESH AND PASS APPROPR IATE ORDER AS PER LAW AND MERITS AND IN THE LIGHT OF THE DECISIONS CITED HEREIN ABOVE. WHILE DOING SO, WE AL SO DIRECT THE LD. ASSESSING OFFICER TO CONSIDER THE DE CISION OF THE TRIBUNAL IN THE CASE M/S AGILE ELECTRIC SUB ASSEMBLY PVT. LTD. CITED SUPRA WHEREIN IT WAS HELD AS FOLLOWS:- 7.2 IN REGARD TO APPLICABILITY OF SECTION 14A OF THE ACT READ WITH RULE 8D ALSO; THE ABOVE VIEW WILL BE APPLICABLE. MOREOVER IN THE CASE EIH ASSOCIATED HO TELS LTD V. DCIT REPORTED IN 2013 (9) TMI 604 IN ITA NO.1503 , 1624/MDS/2012 DATED 17 TH JULY, 2013, IT HAS BEEN HELD BY THE CHENNAI BENCH OF THE TRIBUNAL AS FOLLOWS:- DISALLOWANCE U/S. 14A RW RULE 8D CIT UPHELD DISALLOWANCE HELD THAT INVESTMENTS MADE BY THE ASSESSEE IN THE SUBSIDIARY COMPANY ARE NOT ON ACCOU NT OF INVESTMENT FOR EARNING CAPITAL GAINS OR DIVIDEND IN COME. SUCH INVESTMENTS HAVE BEEN MADE BY THE ASSESSEE TO PROMOTE SUBSIDIARY COMPANY INTO THE HOTEL INDUSTRY. A PERUSAL OF THE ORDER OF THE CIT(APPEALS) SHOWS THAT OUT OF TOTAL INVESTMENT OF RS.64,18,19,775/-, RS.63,31,25, 715/- IS INVESTED IN WHOLLY OWNED SUBSIDIARY. THIS FACT SUP PORTS THE CASE OF THE ASSESSEE THAT THE ASSESSEE IS NOT INTO THE BUSINESS OF INVESTMENT AND THE INVESTMENTS MADE BY THE ASSESSEE ARE ON ACCOUNT OF BUSINESS EXPEDIENCY. AN Y DIVIDEND EARNED BY THE ASSESSEE FROM INVESTMENT IN SUBSIDIARY COMPANY IS PURELY INCIDENTAL. THEREFORE , THE INVESTMENTS MADE BY THE ASSESSEE IN ITS SUBSIDIARY ARE NOT TO BE RECKONED FOR DISALLOWANCE U/S. 14A R.W.R. 8D. THE ASSESSING OFFICER IS DIRECTED TO RE-COMPUTE THE AVE RAGE VALUE OF INVESTMENT UNDER THE PROVISIONS OF RULE 8D AFTER DELETING INVESTMENTS MADE BY THE ASSESSEE IN SUBSID IARY COMPANY DECIDED IN FAVOUR OF ASSESSEE. FOR THE ABOVE SAID REASONS, WE HEREBY HOLD THAT IN THE CASE OF THE ASSESSEE THE PROVISIONS OF SECTION 14A READ WIT H RULE 8D WILL NOT BE APPLICABLE IN REGARD TO INVESTMENTS MADE FOR ACQUIRING THE SHARES OF THE ASSESSEES SISTER CONCERNS. ACCORDING LY WE RESTRAIN 7 ITA NO.56/MDS/2014 OURSELVES FROM INTERFERING WITH THE ORDER OF THE LD .CIT(A) ON THIS REGARD. 7. THEREFORE, FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL, WE HEREBY DIRECT THE LEARNED ASSESSIN G OFFICER TO DELETE THE ADDITION MADE BY INVOKING THE PROVISIONS OF SECTION 14A R.W.RULE 8D OF THE ACT, SUBJECT TO VERIFICATION THAT INVESTMENTS ARE MADE B Y THE ASSESSEE IN ITS SISTER CONCERNS ONLY AND FROM I TS INTEREST FREE FUNDS. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON THE 29 TH MARCH, 2016 SD/- SD/- ( . ) ( . ) (G.PAVAN KUMAR) ( A.MOHAN ALANKAM ONY ) ! # / JUDICIAL MEMBER # / ACCOUNTANT MEMBER ! /CHENNAI, & /DATED 29 TH MARCH, 2016 SOMU *+ ,+ /COPY TO: 1. APPELLANT 2. RESPONDENT 3. - () /CIT(A) 4. - /CIT 5. + 1 /DR 6. /GF .