Veljan Hydrair Pvt.Ltd, Hyderabad V. DCIT, Hyderabad

ITA 623/HYD/2010

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 7161 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 7 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 23-06-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 28-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B V PRASAD REDDY
• Assessee Lawyers: V SIVA KUMAR
• Keywords: Notional interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, A.M. & SMT. ASHA VIJAYARAGHAVAN, J.M. ITA NO.623/HYD/2010 ASSESSMENT YEAR 2006-07 M/S VELJAN HYDRAIR PVT. LIMITED HYDERABAD (PAN AAACV9608A) VS THE DCIT, CIRCLE 3(3), HYDERABAD APPELLANT RESPONDENT APPELLANT BY : SHRI V. SIVAKUMAR RESPONDENT BY : SHRI B.V. PRASAD REDDY DATE OF HEARING : 18.10.20111 DATE OF PRONOUNCEMENT : ORDER PER ASHA VIJAYARAGHAVAN, JM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT(A)IV, HYDERABAD DATED 15.2.2010 A ND PERTAINING TO THE ASSESSMENT YEAR 2006-07, CONFIRMI NG THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING RS 3 ,21,900/- OUT OF INTEREST DEBITED TO PROFIT AND LOSS ACCOUNT ON THE GROUND THAT SUCH BORROWINGS HAS BEEN UTILIZED FOR M AKING INVESTMENTS INCOME FROM WHICH IS EXEMPT FROM TAX. 2. THE ASSESSING OFFICER ON A PERUSAL OF THE BALAN CE SHEET FOUND THAT THE ASSESSEE HAS INVESTED A SUM OF RS. 21.49 LAKHS IN THE SHARE CAPITAL OF A COMPANY WITH THE INTENTION TO EARN DIVIDEND INCOME WHICH IS EXEMPT F ROM TAX. AS THE ASSESSEE IS BORROWING FUNDS ON INTEREST FOR BUSINESS PURPOSES, HE DISALLOWED PRO RATA INTEREST OF RS. 3, 21,900/- AS THE INTEREST ATTRIBUTABLE TO THE INVESTMENT MADE FOR ITA NO.623 OF 2010 M/.S VELJAN HYDRAIR P LTD., HYD. 2 EARNING DIVIDEND INCOME IS NOT ALLOWABLE FROM BUSI NESS PROFITS. CONSIDERING AN AVERAGE INTEREST RATE OF 1 5% THE NOTIONAL INTEREST ON THE ASSESSEES INVESTMENT OF R S. 21.46 LAKHS WORKS OUT TO RS. 3,21,000/- WHICH WAS DISALL OWED. 3. ON APPEAL BEFORE THE CIT(A), WITH REGARD TO THE DISALLOWANCE OF RS 3,21,900/- OUT OF INTEREST EXPEN DITURE, IT WAS SUBMITTED THAT IT HAD MADE INVESTMENTS AMOUNTIN G TO RS 21,49,000/- IN VARIOUS COMPANIES DURING THE YEAR S 1976-77 TO 2000-01 FROM OUT OF INTERNAL ACCRUALS AN D NOT FROM OUT OF BORROWED FUNDS. IT WAS FURTHER SUBMITT ED THAT DURING THE ASST. YEAR 2006-07 NO FRESH INVESTMENTS HAVE BEEN MADE. IT WAS ALSO SUBMITTED THAT THE LOAN TAKE N BY THE APPELLANT CAME DOWN TO RS 3,47,73,777 AT END OF THE ASST. YEAR AS AGAINST LOAN OF RS 3,81,66,639/- STOOD AT T HE BEGINNING OF THE ASST. YEAR 2006-07 WHICH INDICATE S THAT THE APPELLANT HAD IN FACT REPAID LOAN OF RS 33,92,8 62 DURING THE ASST. YEAR 2006-07. IT WAS AVERTED THAT THE A PPELLANT IS EARNING PROFITS FOR LAST SO MANY YEARS AND A PRO FIT OF RS 4.95 CRORES IN ASST. YEAR 2005-06 AND RS 5.73 CRORE S IN ASST. YEAR 2006-07. IT WAS ALSO SUBMITTED THAT IT HAD ACCUMULATED RESERVES OF RS 5.38 CRORES AS ON 31.3.2 005 AND RS 8.84 CRORES AS ON 31.3.2006. IT WAS FURTHER SUBMITTED THAT THE INVESTMENTS WERE MADE BY THE APP ELLANT FROM OUT OF INTERNAL ACCRUALS BUT NOT FROM BORROWED FUNDS. SINCE THE APPELLANT HAD NOT MADE ANY INVESTMENTS DU RING THE ASST. YEAR 2006-07, THE ASSESSING OFFICER IS NO T CORRECT IN DISALLOWING RS 3,21,900 OUT OF INTEREST DURING T HE YEAR. ITA NO.623 OF 2010 M/.S VELJAN HYDRAIR P LTD., HYD. 3 4. THE CIT(A) DISMISSED THE APPEAL OF THE ASSESSEE OBSERVING AS UNDER: AS REGARDS THE DISALLOWANCE OF INTEREST EXPENSES O F RS 3,21,900/- IT IS SEEN THAT EVEN THOUGH THE INVESTMENT IN SHARES FOR THE PURPOSE OF EARNING EXEMPTED DIVIDEND INCOME HAD NOT BEEN MADE OUT OF BORROWED FUNDS, IN THE LIGHT OF THE DECISION OF HON BLE KERALA HIGH COURT IN THE CASE OF CIT VS VI BABY & C O., (SUPRA) IT CAN BE SAID THAT HAD THE APPELLANT NOT U SED ITS BUSINESS FUNDS TO THAT EXTENT IN MAKING INVESTM ENT IN SHARES, IT WOULD NOT HAVE BEEN REQUIRED TO MAKE BORROWINGS TO THAT EXTENT. HONBLE KERALA HIGH COU RT HAVE OPINED THAT IN SUCH CASES, THE BORROWALS ARE T O BE CONSIDERED AS MADE FOR SUPPLEMENTING THE FUNDS WHICH HAVE BEEN DIVERTED FOR NON BUSINESS PURPOSE. HONBLE MADRAS BENCH OF THE ITAT ALSO IN THE CASE O F MGM DIAMOND BEACH RESORTS P. LTD VS DCIT (2008 TIOL 463 ITAT MAD) HAVE OPINED THAT INTEREST EXPENSES WOULD NOT BE ALLOWABLE, IF THE FUNDS HAVE BEEN USED FOR MAKING INVESTMENT IN SHARES FOR THE PURPOSE OF EARNING DIVIDEND . ON THE OTHER HAND, IT IS CLEAR THAT THE APPELLANT HAS NOT BEEN ABLE TO ESTAB LISH ANY BUSINESS PURPOSE OR CIRCUMSTANCES REFLECTING BUSINESS EXPEDIENCY IN MAKING INVESTMENT IN SUCH SHARES. FURTHER IT IS ALSO SEEN THAT THE APPELLANT HAS NOT CHALLENGED THE AVERAGE INTEREST RATE OF 15% ADOPTED BY THE ASSESSING OFFICER. UNDER THE CIRCUMSTANCES I AGREE WITH THE VIEW OF THE ASSESSIN G OFFICER REGARDING DISALLOWANCE OF PROPORTIONATE INT EREST OF RS. 3,21,900/- IS THEREFORE DECIDED AGAINST THE APPELLANT. ITA NO.623 OF 2010 M/.S VELJAN HYDRAIR P LTD., HYD. 4 5. AGGRIEVED THE ASSESSEE IS ON APPEAL BEFORE US. IT IS THE CONTENTION OF THE ASSESSEE THAT INVESTMEN TS WERE NOT MADE OUT OF BORROWED FUND BUT WAS ONLY OUT OF I NTERNAL ACCRUALS. IT IS ALSO POINTED OUT THAT THEY HAVE EA RNED PROFIT OF RS.4.95 CRORES IN THE ASSESSMENT YEAR 2005-06 AN D RS.5.73 CRORES FOR THE ASSESSMENT YEAR 2006-07 WITH THE ACCUMULATED RESOURCES OF RS.8.84 CRORES ACCRUED AS ON 31.03.2006. HENCE INVESTMENT OF RS.21.46 CRORES SH OULD BE CONSIDERED AS HAVING BEEN MADE OUT OF OWN FUND. 6. WE FIND THAT THE ASSESSING OFFICER HAS DISALLOWED RS.321000/- AS BEING NOTIONAL INTEREST ATTRIBUTABLE TO INVESTMENT IN SHARES BUT THERE HAS BEEN NO DISALLOWANCE OF SIMILAR NATURE FOR THE EARLIER YEAR S. IN VIEW OF THE HUGE PROFIT EARNED BY THE ASSESSEE FROM YEAR TO YEAR AS ALSO ACCUMULATED RESOURCES AVAILABLE TO THE ASSE SSEE WE HOLD THAT INVESTMENT SHOULD BE CONSIDERED AS HAVING BEEN MADE OUT OF INTERNAL ACCRUALS AND NO PART OF THE BO RROWALS CAN BE SAID TO HAVE BEEN UTILIZED FOR THE PURPOSE O F INVESTMENT. UNLESS THE ASSESSING OFFICER PROVES TH AT THE BORROWED FUND HAVE BEEN ACTUALLY BEEN UTILIZED FOR THE PURPOSE OF MAKING INVESTMENT IN SHARES, NO ADHOC DISALLOWANCE CAN BE MADE UNDER SECTION 14A. THE DE CISION OF THE PUNJAB AND HARIYANA HIGH COURT IN THE CASE O F HERO CYCLES LTD REPORTED IN 323 ITR 518 SUPPORTS THIS VI EW. ITA NO.623 OF 2010 M/.S VELJAN HYDRAIR P LTD., HYD. 5 7. IN THE CIRCUMSTANCES WE DELETE THE ADDITION OF RS.321000/- MADE UNDER SECTION 14A TOWARDS NOTIONAL INTEREST ON THE QUANTUM OF INVESTMENT MADE IN SHARE S. 8. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT 14.12.2011 SD/- SD/- (CHANDRA POOJARI) ( (ASHA VIJAYA RAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 14 TH DECEMBER, 2011 COPY FORWARDED TO: 1. M/S VELJAN HYDRAIR PVT. LTD., A-18 & 19, APIE, BALANAGAR, HYDERABAD-37. 2. THE DCIT, CIRCLE 3(3), HYDERABAD 3. THE CIT(A)-IV, HYDERABAD 4. THE CIT, HYDERABAD 5. THE DR, ITAT, HYDERABAD NP/