SHREE SHYAMKAMAL FINANCE & LEASING CO. P.LTD, NAVI MUMBAI V. ITO 8(3)-1, MUMBAI

ITA 6173/MUM/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 93115 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 8 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 24-06-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 09-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NEIL PHILIP
• Assessee Lawyers: S M BANDI
• Keywords: Business expenditure; Earning of tax free income; Revenue expenditure
• Section: 14A; 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ITA NO.6173/M/2012 ASSESSMENT YEAR: 2004-05 M/S. SHREE SHYAMKAMAL FINANCE AND LEASING CO. PVT. LTD., 108-D, SHYAMKAMAL BUILDING, B.N. AGARWAL MARKET, TEJPAL ROAD, VILE PARLE (EAST), MUMBAI 400 057 PAN: AAFCS 8670J VS. INCOME TAX OFFICER 8(3)1, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI - 400020 (APPELLANT) (RESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI S.M. BANDI, A.R. REVENUE BY : SHRI NEIL PHILIP, D.R. DATE OF HEARING : 30.06.2015 DATE OF PRONOUNCEMENT : 30.06.2015 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSES SEE AGAINST THE ORDER DATED 23.08.2012 OF THE COMMISSIONER OF INCOME TAX (APPEALS) [HEREINAFTER REFERRED TO AS THE CIT(A)] RELEVANT TO ASSESSMENT Y EAR 2004-05. 2. THE ASSESSEE, THROUGH ITS GROUNDS OF APPEAL, HAS CONTESTED THE DISALLOWANCE OF INTEREST EXPENDITURE OF RS.12,24,30 8/-. THIS IS THE SECOND ROUND OF APPEAL BEFORE US. THE ORIGINAL RETURN OF THE ASSESSEE WAS PROCESSED UNDER SECTION 143(1) OF THE ACT. THEREAFTER, THE C ASE WAS REOPENED UNDER SECTION 147 OF THE ACT. THE ASSESSING OFFICER (HER EINAFTER REFERRED TO AS THE AO) NOTED THAT THE ASSESSEE HAD TAKEN INTEREST BEAR ING LOANS AND THE SAME WERE ITA NO.6173/M/2012 M/S. SHREE SHYAMKAMAL FINANCE AND LEASING CO. PVT. LTD. 2 UTILIZED FOR MAKING INVESTMENT IN UNQUOTED EQUITY S HARES OF SUBSIDIARY COMPANY OF THE ASSESSEE. THE AO DISALLOWED INTERES T AMOUNT OF RS.12,24,308/- UNDER SECTION 36(1)(III) OF THE ACT. THE ASSESSEE PREFERRED APPEAL BEFORE THE LD. CIT(A) AGAINST THE SAID ORDER . 3. THE LD. CIT(A), HOWEVER, DIRECTED THE AO TO COMP UTE DISALLOWANCE UNDER RULE 8D FOR THE PURPOSE OF DISALLOWANCE UNDER SECTION 14A INSTEAD OF THAT UNDER SECTION 36(1). THE ASSESSEE PREFERRED A PPEAL BEFORE THE ITAT AGAINST THE ORDER OF THE LD. CIT(A). THE ITAT VIDE ORDER DATED 04.02.11 PASSED IN ITA NO.433/M/2010 SET ASIDE THE ISSUE TO THE FILE OF THE AO RELYING ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNA L IN THE CASE OF CHEM. INVESTMENTS VS. ITO 124 TTJ 577 AND IN THE LIGHT O F THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT 43 TDR 171 WHEREIN THE HONBLE B OMBAY HIGH COURT HAS HELD THAT THE RULE 8D IS NOT RETROSPECTIVE AND IS A PPLICABLE FROM ASSESSMENT YEAR 2008-09. IN THE SET ASIDE PROCEEDINGS THE ASSESSEE REITERATE D HIS SUBMISSIONS AND PLEADED THAT THE ASSESSEE DID NOT EARN ANY EXEMPT INCOME DU RING THE YEAR, HENCE NO DISALLOWANCE UNDER SECTION 14A WAS ATTRACTED. IT H AS BEEN FURTHER SUBMITTED THAT THE BORROWED FUNDS WERE USED FOR THE PURPOSE O F STRATEGIC INVESTMENTS FOR OBTAINING CONTROLLING INTEREST IN THE SUBSIDIARY CO MPANY. EVEN SUBSEQUENTLY THE SAID COMPANY HAD BECOME WHOLLY SUBSIDIARY OF TH E ASSESSEE COMPANY. THE AO, HOWEVER, DID NOT AGREE WITH THE ABOVE CONTENTIO N OF THE ASSESSEE. HE, RELYING UPON THE DECISION OF THE SPECIAL BENCH OF T HE TRIBUNAL IN THE CASE OF CHEM INVESTMENTS (SUPRA) HELD THAT EVEN IF THERE WAS NO EXEMPT INCOME DURING THE YEAR STILL, THE PROVISIONS OF SECTION 14 A WERE APPLICABLE. HE FURTHER OBSERVED THAT THE ASSESSEE HAD USED INTEREST BEARIN G BORROWINGS FOR INVESTMENT IN SUBSIDIARY COMPANY AND THE SAME WERE NOT USED FO R BUSINESS PURPOSE OF THE ITA NO.6173/M/2012 M/S. SHREE SHYAMKAMAL FINANCE AND LEASING CO. PVT. LTD. 3 ASSESSEE. HE THEREAFTER CONCLUDED THAT SINCE THE A SSESSEE HAD UTILIZED THE INTEREST BEARING BORROWED FUNDS FOR MAKING INVESTME NT IN THE SHARES OF THE SUBSIDIARY COMPANY, HENCE THE INTEREST EXPENDITURE WAS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . HE, THEREFORE, DISALLOWED THE SAID INTEREST EXPENDITURE UNDER SECT ION 14A OF THE ACT. THE AO FURTHER OBSERVED THAT THE INTEREST PAYMENT WAS ALSO NOT ALLOWABLE UNDER SECTION 36(1)(III) OF THE ACT AS IT WAS APPARENT THAT THE A SSESSEE HAD TAKEN INTEREST BEARING LOAN FROM DIRECTORS AND THE SAME HAD BEEN U SED FOR MAKING INVESTMENT IN UNQUOTED EQUITY SHARES OF SUBSIDIARY COMPANY AND HENCE THE SAID FUNDS WERE USED FOR NON BUSINESS PURPOSES. HE ACCORDINGL Y HELD THAT EVEN THE INTEREST PAYMENT OF RS.12,24,308/- WAS NOT ALLOWABL E UNDER SECTION 36(1)(III) OF THE ACT. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE FILED APPEAL BEFORE THE LD. CIT(A). 4. THE LD. CIT(A) VIDE IMPUGNED ORDER HELD THAT SIN CE THE AMOUNT OF INTEREST PAID BY THE ASSESSEE ON THE BORROWINGS WAS UTILIZED FOR ACQUIRING THE CONTROLLING INTEREST OF COMPANY BY WAY OF SHARE ACQ UISITION AND THEREFORE THE EXPENDITURE INCURRED WAS ON CAPITAL ACCOUNT AND NOT A REVENUE EXPENDITURE. HE, THEREFORE, UPHELD THE DISALLOWANCE MADE BY THE AO. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE ASSESSEE HAS COME IN A PPEAL BEFORE US. 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND HAVE ALS O GONE THROUGH THE RECORDS. ADMITTEDLY, THE ASSESSEE HAD UTILIZED THE BORROWED FUNDS FOR PURCHASING THE SHARES OF THE SUBSIDIARY COMPANY FOR ACQUIRING THE CONTROLLING INTEREST OF THE COMPANY. THE CONTENTION OF THE ASS ESSEE IS THAT THE SAID INVESTMENT WAS MADE FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. IT HAS ALSO BEEN SUBMITTED THAT EARLIER THE ASSESSEE HAD GAINED CONTROLLING INTEREST IN THE SUBSIDIARY BUT LATER ON IT ACQUIRED THE FULL INTERE ST IN THE SAID COMPANY. THE ITA NO.6173/M/2012 M/S. SHREE SHYAMKAMAL FINANCE AND LEASING CO. PVT. LTD. 4 LD. A.R. OF THE ASSESSEE HAS BROUGHT OUR ATTENTION TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT, PANA JI, GOA VS. PHIL CORPN. LTD. (2011) 202 TAXMAN 368 WHEREIN THE HONBLE BOM BAY HIGH COURT HAS HELD THAT WHERE THE INVESTMENT IN SHARES OF SISTER/ SUBSIDIARY COMPANY IS MADE TO HAVE CONTROL OVER THAT COMPANY AND FURTHER THAT SUCH AN INVESTMENT WAS ACCORDINGLY PART OF THE BUSINESS ACTIVITY OF THE AS SESSEE, IN THAT EVENT, THE ASSESSEE IS ENTITLED TO DEDUCTION OF INTEREST PAID ON THE BORROWED AMOUNT UNDER SECTION 36(1)(III) OF THE ACT. IN THIS CASE ALSO THE ASSESSEE COMPANY IS ENGAGED I N THE BUSINESS OF FINANCE AND INVESTMENT IN EQUITY SHARES. THE BORROWED CAPI TAL WAS USED FOR ACQUIRING THE EQUITY SHARES OF THE SUBSIDIARY TO HAVE CONTROL LING INTEREST. THE PROPOSITION OF LAW LAID DOWN BY THE HONBLE BOMBAY HIGH COURT I N THE CASE OF PHIL CORPN. LTD. (SUPRA) IS SQUARELY APPLICABLE TO THE CASE OF THE ASSESSEE. WE, FURTHER FIND THAT RECENTLY THE HONBLE DELHI HI GH COURT IN THE CASE OF EICHER GOODEARTH LTD. VS. CIT ( 2015) 60 TAXMAN.COM 268 (DEL.) HAS HELD THAT IF THE EXPENDITURE IS INCURRED FOR THE PURPOSE OF PROMOTION OF BUSINESS- MORE SPECIFICALLY TO RETAIN CONTROL OR AS PART OF T HE STRATEGIC INVESTMENT OF THE ASSESSEE COMPANY, SUCH EXPENSES BY WAY OF INTEREST OUT GO WOULD HAVE TO BE TREATED AS ALLOWABLE UNDER SECTION 36(1)(III) OF TH E ACT. THE ABOVE DECISION OF THE HONBLE DELHI HIGH COURT IS ALSO SQUARELY APPLI CABLE TO THE FACTS OF THE CASE OF THE ASSESSEE. 6. IN VIEW OF THE ABOVE DECISIONS OF THE HONBLE BO MBAY HIGH COURT AND THE HONBLE DELHI HIGH COURT, SINCE THE INTEREST EX PENDITURE INCURRED BY THE ASSESSEE IS ALLOWABLE UNDER SECTION 36(1)(III) OF T HE ACT AS BUSINESS EXPENSES, THERE IS NO QUESTION OF DISALLOWANCE OF THE SAME UN DER SECTION 14A OF THE ACT ON ACCOUNT OF INVESTMENTS MADE IN RELATION TO EARNI NG OF EXEMPT INCOME. THE FACTS ON THE FILE CLEARLY REVEAL THAT THE INVESTMEN T IN THE SHARES OF THE ITA NO.6173/M/2012 M/S. SHREE SHYAMKAMAL FINANCE AND LEASING CO. PVT. LTD. 5 SUBSIDIARY COMPANY WAS NOT MADE FOR THE PURPOSE OF EARNING OF ANY EXEMPT INCOME RATHER IT WAS MADE FOR GAINING CONTROLLING I NTEREST OVER THE SUBSIDIARY WHICH AS PER THE LAW LAID DOWN BY THE HONBLE BOMBA Y HIGH COURT IN THE CASE OF CIT, PANAJI, GOA VS. PHIL CORPN. LTD. (SUPRA) AND HONBLE DELHI HIGH COURT IN THE CASE OF EICHER GOODEARTH LTD. VS. CIT (SUPRA) IS HELD TO BE FOR THE PURPOSE OF PROMOTION OF THE BUSINESS OF THE ASS ESSEE. EVEN IT IS ALSO AN ADMITTED FACT THAT THE ASSESSEE DURING THE YEAR HAD NOT EARNED ANY EXEMPT INCOME. THE AO HAD MADE THE DISALLOWANC E UNDER SECTION 14A RELYING UPON THE DECISION OF THE SPECIAL BENCH OF T HE TRIBUNAL IN THE CASE OF CHEM. INVESTMENTS VS. ITO (SUPRA). HOWEVER, WE F IND THAT THE SAID SPECIAL BENCH DECISION OF THE TRIBUNAL HAS BEEN OVERRULED B Y THE HONBLE DELHI HIGH COURT IN THE CASE OF CHEM. INVESTMENTS VS. CIT ST YLED AS (2015) 61 TAXMAN.COM 118 WHEREIN THE HONBLE DELHI HIGH COURT HAS HELD THAT THE SECTION 14A WILL NOT APPLY IF NO EXEMPT INCOME IS R ECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR. IDENTICAL VIEW HAS BEEN TAKEN BY THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF CIT KA NPUR VS. M/S. SHIVAM MOTORS PVT. LTD. IN ITA NO.88 OF 2014 VIDE ORDER D ATED 05.05.2014; BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. CORRTECTH ENERGY PVT. LTD. IN ITA NO.239 OF 2014 VIDE ORDER DATED 24.03. 2014 AND BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. M/S. DELI TE ENTERPRISES IN ITA NO.110 OF 2009 VIDE ORDER DATED 26.02.09. IN VIEW OF THE ABOVE, EVEN OTHERWISE, NO DISALLOWANCE IS WARRANTED UNDER SECTI ON 14A OF THE ACT ALSO, IN THE CASE OF THE ASSESSEE. 7. IN VIEW OF OUR ABOVE OBSERVATIONS, NEITHER ANY I NTEREST DISALLOWANCE IS WARRANTED IN THIS CASE UNDER SECTION 36(1)(III) OF THE ACT NOR UNDER SECTION 14A OF THE ACT. WE HOLD ACCORDINGLY. ITA NO.6173/M/2012 M/S. SHREE SHYAMKAMAL FINANCE AND LEASING CO. PVT. LTD. 6 8. IN RESULT, THE APPEAL OF THE ASSESSEE IS HEREBY ALLOWED. ORDER WAS PRONOUNCED IN THE OPEN COURT ON 30.06.201 5. SD/- SD/- (R.C. SHARMA) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 30.10.2015. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORD ER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.