Virchow Laboratories Ltd., Hyd, Hyderabad V. Addl. CIT, Range-3, Hyd, Hyderabad

ITA 59/HYD/2016

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 0822 (ITAT-HYDERABAD)
• Duration Of Justice: 5 year(s) 5 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-07-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB-B
• Next Hearing Date: 19-04-2021
• Assessment Year: 2012-2013
• Appeal Filed On: 14-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: S RAMA RAO
• Keywords: Earning of tax free income; Rule 8D
• Section: 143(3); 14A; 13

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD (THROUGH VIRTUAL HEARING) BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NOS. 58 & 59/HYD/2016 A.Y. 2011 - 12 & 2012 - 13 VIRCHOW LABORATORIES LTD., HYDERABAD. PAN: AAACV 7245 F VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE - 3, HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY SRI S. RAMA RAO REVENUE BY SRI ROHIT MUJUMDAR, DR DATE OF HEARING: 19/04/2021 DATE OF PRONOUNCEMENT: 08 /07/2021 ORDER PER A. MOHAN ALANKAMONY , A.M: THESE APPEALS ARE FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD. CIT(A) - 5, HYDERABAD IN APPEAL NO. 0539 & 0672/2014 - 15/CIT(A) - 5, DATED 30/10/2015 PASSED U/S. 143(3) R.W.S 250(6) OF THE ACT FOR THE A.YS 2011 - 12 AND 2012 - 13. 2. THE ASSESSEE HAS RAISED FOUR IDENTICAL GROUNDS IN ITS APPEAL FOR THE AY 2011 - 12 AND 2012 - 13 HOWEVER THE CRUX OF THE ISSUE IN BOTH THE APPEALS ARE AS FOLLOWS: 2 (I) THE LD. CIT (A) HAS ERRED IN CONFIRMING THE ORDER OF THE LD. AO WHO HAD DISALLOWED THE CLAIM OF WEIGHTED DEDUCTION U/S. 35(2AB) OF THE ACT AMOUNTING TO RS. 77,54 ,893/ - FOR THE AY 2011 - 12 AND RS. 68,52,201/ - FOR THE AY 2012 - 13 FOR FAILURE TO FURNISH FORM 3CL ISSUED BY THE SECRETARY, DSIR. (II) THE LD. CIT (A) HAD ERRED IN CONFIRMING THE ORDER OF THE LD. AO WHO HAD DISALLOWED EXPENDITURE INCURRED TOWARDS EXEMPT INCOME U/ S. 14A R.W. RULE 8D(2) OF THE ACT AMOUNTING TO RS. 32,690/ - AND RS. 19,31,096/ - FOR THE AYS 2011 - 12 AND 2012 - 13 RESPECTIVELY. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING BULK DRUGS FIL ED ITS RETURN OF INCOME DISCLOSING AN INCOME OF RS. 33,52,03,603/ - AND RS. 30,23,38,657/ - ON 29/09/2011 AND 26/09/2012 FOR THE AY 2011 - 12 AND 2012 - 13 RESPECTIVELY. THEREAFTER THE CASE WAS TAKEN UP FOR SCRUTINY UNDER CASS AND ASSESSMENT WAS COMPLETED WHERE IN THE ABOVE STATED ADDITIONS MADE BY THE LD. AO WHICH WERE FURTHER SUSTAINED BY THE LD. CIT (A). 4. GROUND NO.1: DISALLOWANCE U/S. 35(2AB) OF THE ACT: 3 5. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEEDINGS, IT WAS OBSERVED BY THE LD. AO THAT THE ASSESSEE HAD CLAIMED DEDUCTION U/S. 35(2AB) OF THE ACT FOR RS. 77,54,893/ - AND RS. 68,52,201/ - FOR THE AY 2011 - 12 AND 2012 - 13 RESPECTIVELY. THE LD. AO DISALLOWED THE CLAIM OF WEIGHTED DEDUCTION BECAUSE THE ASSESSEE HAD FAILED TO FURNISH FORM 3CL ISSUED BY THE SECRETARY, DSIR AS PRESCRIBED UNDER THE ACT. THE CLAIM OF THE ASSESSEE WAS THAT IT HAD APPLIED TO THE SECRETARY, DSIR HOWEVER, THEY HAVE FAILED TO ISSUE THE SAME. THEREFORE, IT WAS BEYOND THE CONTROL OF THE ASSESSEE TO FURNISH THE REQUISITE FORM NO. 3 CL. THE ASSESSEE HAD ALSO RELIED ON CERTAIN DECISIONS TO JUSTIFY ITS CLAIM. HOWEVER, THE LD. AO AS WELL AS THE LD. CIT (A) REJECTED THE CLAIM OF THE ASSESSEE. 6. AT THE OUTSET, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. REVENUE AUTHORITIES O N THIS ISSUE. THERE ARE VERY MANY COMPLIANCES TO BE FOLLOWED AS PRESCRIBED BY THE DSIR AUTHORITIES WHICH ARE TO BE VERIFIED AND CERTIFIED BY DSIR AUTHORITIES. UNLESS AND UNTIL SUCH COMPLIANCES ARE METICULOUSLY FOLLOWED THE SECRETARY, DSIR WILL NOT ISSUE F ORM 3CL. THEREFORE, THE ONUS IS ON THE ASSESSEE TO TAKE UP ITS CASE BEFORE THE DSIR AUTHORITIES AND OBTAIN THE FORM 3CL FROM THEM. AT THIS STAGE, WE ARE NOT AWARE WHETHER THE FORM 3CL IS ISSUED BY THE SECRETARY, DSIR OR REJECTED. KEEPING IN VIEW OF THE F ACTS AND CIRCUMSTANCES OF THE CASE, WE HEREBY REMIT THE MATTER TO THE FILE OF THE 4 LD. AO FOR BOTH THE ASSESSMENT YEARS THEREBY GRANTING ONE MORE OPPORTUNITY TO THE ASSESSEE TO OBTAIN AND PRODUCE THE FORM 3CL BEFORE THE LD. AO. WE ALSO HEREBY DIRECT THE L D AO TO GRANT DEDUCTION U/S. 35(2AB) OF THE ACT IF THE ASSESSEE PRODUCE FORM 3CL AND COMPLY WITH THE PROVISIONS OF THE ACT EVEN AT THIS STAGE AND IF THE ASSESSEE IS UNABLE TO PRODUCE THE REQUISITE FORM 3CL AND COMPLY WITH THE PROVISIONS OF THE ACT, THEN THE EARLIER ORDER OF THE LD. AO SHALL STAND REINSTATED. IT IS ORDERED ACCORDINGLY. 7. GROUND NO.2: DISALLOWANCE OF EXPENDITURE INCURRED TOWARDS EXEMPT INCOME U/S. 14A R.W. RULE 8D(2) OF THE ACT: 8. DURING THE ASSESSMENT PROCEEDINGS IT WAS OBSERVED BY THE LD. AO THAT THE ASSESSEE HAD MADE INVESTMENT IN EQUITY SHARES EARNING EXEMPT INCOME . T HEREFORE THE LD. AO INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT AND MADE ADDITION OF RS. 32,690/ - AND RS. 19 ,31,096/ - FOR THE AY 2011 - 12 AND 2012 - 13 RESPECTIVELY WHICH WAS CONFIRMED BY THE LD. CIT (A). 9. AT THE OUTSET, THE LD. AR SUBMITTED THAT THE ASSESSEE HAD INVESTED IN EQUITY SHARES OF ITS SISTER COMPANY OUT OF ITS NON - INTEREST - BEARING FUNDS AND THEREFORE, THERE WAS NO EXPENDITURE INCURRED BY THE ASSESSEE FOR MAKING SUCH INVESTMENT . IT WAS THEREFORE PLEADED THAT THE ADDITION WAS MADE BY THE LD. AO WHICH WAS FURTHER SUSTAINED BY THE LD. CIT (A) 5 MAY BE DELETED. THE LD. DR ON THE OTHER HAND RELIED ON THE ORD ERS OF THE LD. REVENUE AUTHORITIES AND ARGUED IN SUPPORT OF THE SAME. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE MATERIALS ON RECORD. ON THIS ISSUE THE DIVISION BENCH OF THE ITAT, HYDERABAD IN THE CASE DCIT VS. M/S. SHALIVAHANA GREEN ENERGY LIMITED (ITA NO. 1990/HYD/2018) VIDE ITS ORDERS DATED 15/02/2021 HAS HELD THAT WHEN AN ASSESSEE MAKES INVESTMENT IN ITS SISTER CONCERN OUT OF ITS NON - INTEREST - BEARING FUNDS NO EXPENDITURE CAN BE ATTRIBUTED FOR MAKING SUCH INVESTMEN T. THE RELEVANT ORDER OF THE TRIBUNAL IS EXTRACTED HEREIN BELOW FOR REFERENCE: 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE MATERIALS ON RECORD. FACTUALLY FOR MAKING ANY INVESTMENT IN EQUITY SHARES BY ANY ENTITY ONLY THE FOLLOWING C ATEGORIES OF EXPENDITURE WILL BE ATTRIBUTABLE: - (I) INTEREST ON INTEREST BEARING FUNDS THAT IS UTILISED FOR THE PURPOSE OF MAKING SUCH INVESTMENT. (II) DIRECT AND INDIRECT EXPENSES ATTRIBUTABLE TO THE PROCESS OF MAKING SUCH INVESTMENT SUCH AS EXPENDITURE INCURRED FOR DUE DILIGENCE, MANAGERIAL EXPENDITURE, CLERICAL EXPENSE, STATIONARY EXPENDITURE AND PORTFOLIO MANAGEMENT EXPENDITURE. 7. THERE CANNOT BE ANY OTHER EXPENDITURE OTHER THAN THE EXPENDITURE MENTIONED HEREIN ABOVE THAT CAN BE INCURRED B Y AN ENTITY WHICH WILL BE ATTRIBUTABLE TOWARDS INVESTMENTS MADE IN EQUITY SHARES OF OTHER COMPANIES. IN THE CASE OF THE ASSESSEE, THE ASSESSEE HAS INVESTED IN ITS OWN SUBSIDIARY COMPANIES OUT OF ITS NON - INTEREST - BEARING FUNDS SUCH AS OWN SHARE CAPITAL AND RESERVES AND THIS IS NOT IN DISPUTE. SINCE IN THE CASE OF THE ASSESSEE THE ASSESSEE COMPANY HAS UTILISED ONLY ITS NON - INTEREST - BEARING FUNDS FOR MAKING INVESTMENT IN ITS OWN SUBSIDIARY COMPANY, NO INTEREST COST CAN BE ATTRIBUTABLE TO THE SAME BECAUSE, TH ERE IS NO INTEREST COST TO THE ASSESSEE, AS IT CAN BE TREATED THAT THE ASSESSEE HAS WITHDRAWN FROM ITS CAPITAL AND RESERVES WHICH ARE ASSESSEES INTEREST FREE FUNDS FOR MAKING SUCH INVESTMENT. FURTHER, FOR MAKING INVESTMENT IN ITS OWN COMPANY THERE CANNOT BE ANY COST ATTRIBUTABLE WITH RESPECT TO DIRECT AND INDIRECT EXPENSES TOWARDS THE PROCESS OF DECISION MAKING, DUE DILIGENCE, MANAGERIAL EXPENDITURE AND PORTFOLIO MANAGEMENT EXPENDITURE BECAUSE NO SUCH COST CAN ARISE FOR MAKING INVESTMENT IN ONES OWN ENTI TY. FURTHER, ONLY 6 MEAGRE EXPENSES CAN BE ATTRIBUTABLE WITH RESPECT TO CLERICAL AND STATIONARY EXPENSES WHICH IS NEGLIGIBLE AND THAT IS DESERVED TO BE IGNORED. THEREFORE, FACTUALLY THERE CANNOT BE ANY EXPENDITURE ATTRIBUTABLE TO THE INVESTMENT MADE IN SISTE R COMPANY WHEN THE INVESTMENT IS OUT OF ITS OWN INTEREST FREE FUND. WHEN THE ABOVE FACTS WERE POINTED OUT TO THE LD. DR, HE COULD NOT CONTROVERT TO THE SAME HOWEVER, HE RELIED ON THE ORDER OF THE LD. AO. CONSIDERING THESE FACTUAL ASPECTS OF THE ISSUE, WE A RE OF THE VIEW THAT THE ORDER OF THE LD. CIT (A) DELETING THE DISALLOWANCE OF EXPENDITURE MADE BY THE LD. AO INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES DOES NOT CALL FOR INTERFERENCE. HENCE, WE HEREBY CONFIRM THE ORDE R OF THE LD. CIT (A) ON THIS ISSUE. 11. THEREFORE, IN THE INTEREST OF JUSTICE, WE REMIT THE MATTER BACK TO THE FILE OF THE LD. AO FOR BOTH THE ASSESSMENT YEARS IN ORDER TO VERIFY WHETHER THE ASSESSEE HAD MADE ENTIRE INVESTMENT OF EQUITY SHARE IN ITS SIST ER CONCERN OUT OF ITS INTEREST FREE FUNDS AND IF FOUND SO DELETE THE ADDITION MADE BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT AND IF FOUND OTHERWISE SHALL PASS APPROPRIATE ORDER IN ACCORDANCE WITH LAW AND MERIT. 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES AS INDICATED HEREIN ABOVE. PRONOUNCED IN THE OPEN COURT ON THE 08 TH JULY, 2021. SD/ - SD/ - (P. MADHAVI DEVI) ( A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED: 08 TH JULY , 2021. OKK COPY TO: - 1) VIRCHOW LABORATORIES LTD C/O. SRI S. RAMA RAO, ADVOCATE, FLAT NO.102, SHRIYAS ELEGANCE, 3 - 6 - 643, STREET NO.9, HIMAYATNAGAR, HYDERABAD 500 029. 2) ADDL. CIT, RANGE - 3, INCOME TAX TOWERS, AC GUARDS, HYDERABAD. 3) THE CIT(A) - 5, HYDERABAD. 7 4) THE PR. CIT - 5, HYDERABAD 5) THE DR, ITAT, HYDERABAD 6) GUARD FILE