Shriram Capital Limited, CHENNAI V. ITO (OSD), CHENNAI

ITA 638/CHNY/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0927 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-02-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 31-12-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 29-03-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR S MOHARANA IRS
• Assessee Lawyers: R SIVARAMAN
• Keywords: Earning of tax free income; Commercial expediency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND SHRI S.S.GODARA, JUDICIAL MEMBER I.T.A.NOS. 638, 639 & 640/MDS/2012 ASSESSMENT YEARS : 2005-06, 2007-08 & 2008-09 SHRIRAM CAPITAL LIMITED (FORMERLY KNOWN AS SHRIRAM FINANCIAL SERVICES HOLDINGS PVT. LTD.), MOOKAMBIKA COMPLEX, 123, ANGAPPA NAICKEN ST., CHENNAI-600 001. PAN AABCS2726B VS. THE INCOME-TAX OFFICER/THE ASSISTANT COMMISSIONER OF INCOME-TAX (OSD), COMPANY CIRCLE-VI(2), CHENNAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI R.SIVARAMAN, ADVOCATE RESPONDENT BY : DR. S.MOHARANA, IRS, CIT DATE OF HEARING : 31 ST DECEMBER, 2012 DATE OF PRONOUNCEMENT : 4 TH FEBRUARY, 2013 O R D E R PER DR. O.K. NARAYANAN, VICE-PRESIDENT THESE THREE APPEALS ARE FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEARS ARE 2005-06, 2007-08 AND 2008-09. THE APPEALS ARE DIRECTED AGAINST THE ORDERS PASSED BY THE COMMISSIONER OF INCOME-TAX(APPEALS)-V AT CHENNAI ON ITA 638 TO 640/12 :- 2 -: 31.1.2012, 6.2.2012 AND 31.1.2012 RESPECTIVELY. TH E ASSESSMENTS IN THESE CASES HAVE BEEN COMPLETED UNDE R SEC. 143(3) OF THE INCOME-TAX ACT, 1961. 2. FIRST, WE WILL CONSIDER THE APPEAL FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2005-06 IN ITA NO.638/MDS/2 012. 2.1. FIRST ISSUE RAISED BY THE ASSESSEE IS AGAINS T THE DISALLOWANCE OF ` 1,72,02,624/- BEING INTEREST PAYMENT IN RESPECT OF LOANS UTILIZED FOR ACQUIRING SHARES OF SHRIRAM I NVESTMENTS LIMITED AND SHRIRAM TRANSPORT FINANCE COMPANY LIMIT ED. IT IS THE CASE OF THE ASSESSEE THAT SEC.14A IS NOT APPLIC ABLE IN RESPECT OF THE ABOVE INTEREST PAYMENT. IT IS ALSO THE CASE OF THE ASSESSEE THAT THE INVESTMENTS WERE MADE BY IT IN THE ABOVE S AID TWO CONCERNS NOT AS INVESTMENTS PER SE, SO AS TO EARN D IVIDEND INCOME, BUT AS A PART OF ITS BUSINESS PROPOSITION I N DEVELOPING AND ENLARGING ANALOGOUS BUSINESS. THE ASSESSEE CONTEN DED THAT WHEN THE SHARES ARE SOLD BY THE ASSESSEE COMPANY, CAPITAL GAINS WILL BE GENERATED WHICH ARE LIABLE FOR TAXATI ON AND, THEREFORE, THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE CANNOT BE CHARACTERIZED AS EXPENDITURE INCURRED FOR EARNING INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOM E UNDER THE ITA 638 TO 640/12 :- 3 -: ACT. HENCE, SEC.14A DOES NOT APPLY TO THIS CASE. THE ASSESSEE ALSO CONTENDED THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IS IN THE CAPITAL FIELD AND, THEREFORE, DOES NOT COME UNDER THE PURVIEW OF SEC.14A. 2.2. A SIMILAR ISSUE WAS CONSIDERED IN ASSESSEES OWN CASE BY INCOME-TAX APPELLATE TRIBUNAL, CHENNAI C BENCH IN THE CASE OF M/S. SHRIRAM CHITS AND INVESTMENTS P. LTD. IN ITA NO.1088/MDS/2006 FOR THE ASSESSMENT YEAR 2002-03 TH ROUGH THEIR COMMON ORDER DATED 19.12.2007. 2.3. IN PARAGRAPH 4 OF THE ABOVE SAID ORDER, THE I SSUE CONSIDERED BY THE TRIBUNAL WAS THAT THE COMMISSIONE R OF INCOME- TAX(APPEALS) HAS ERRED IN NOT ALLOWING THE INTEREST ON CAPITAL BORROWED FOR INVESTMENTS, AS INVESTMENTS WERE MADE OUT OF OWN FUNDS. CONSIDERING THE QUESTION OF MAKING INVESTME NTS AS BUSINESS PROPOSITION AND THE DIVIDEND INCOME BEING EXEMPTED FROM TAXATION, THE TRIBUNAL HELD THAT THE INVESTMEN TS MADE ON THE GROUND OF COMMERCIAL EXPEDIENCY HAS TO BE TREATED A S A BUSINESS INVESTMENT IRRESPECTIVE OF THE FACT THAT THE INCOME ARISING OUT OF SUCH INVESTMENT WILL BE EXEMPTED FROM TAXATION. TH E TRIBUNAL RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF SA BUILDERS LTD. VS. CIT AND ANOTHER REPORTED I N 288 ITR 1. ITA 638 TO 640/12 :- 4 -: 2.4. WE FIND THAT THIS ISSUE OF DISALLOWANCE OF IN TEREST TO THE EXTENT OF ` 1,72,02,624/- IS COVERED BY THE ABOVE SAID ORDER O F THE TRIBUNAL PASSED IN ASSESSEES OWN CASE. IT IS TO BE SEEN THAT THE BUSINESS OF THE ASSESSEE IS INVESTMENT IN SHARE S. IT IS IN THE COURSE OF CARRYING ON OF THE SAID BUSINESS THAT THE ASSESSEE HAS INVESTED IN SHARES OF SHRIRAM INVESTMENTS LIMITED A ND SHRIRAM TRANSPORT FINANCE COMPANY LIMITED. WHETHER THE DIV IDENDS ARISING OUT OF THOSE SHARES WILL BE EXEMPTED FROM T AXATION OR NOT, IS ENTIRELY A DIFFERENT QUESTION. THE FIRST THING TO BE EXAMINED IS THE PURPOSE OF INVESTMENTS MADE BY THE ASSESSEE IN SHARES ON THE TESTING GROUND OF COMMERCIAL EXPEDIENCY. IN THE PRESENT CASE, THE ASSESSEE ENGAGED IN THE BUSINESS OF INVES TING IN SHARES, HAS MADE INVESTMENTS IN SHARES OF GROUP COM PANIES VIZ., SHRIRAM INVESTMENTS LIMITED AND SHRIRAM TRANSPORT F INANCE COMPANY LIMITED. IN THAT WAY, THE ASSESSEE COMPANY IS STRENGTHENING THE CAPITAL AND LIQUIDITY BASE OF THO SE TWO COMPANIES VIZ., SHRIRAM INVESTMENTS LIMITED AND SHR IRAM TRANSPORT FINANCE COMPANY LIMITED. THE STRENGTHENI NG OF THE CAPITAL BASE AND LIQUIDITY OF THOSE ASSOCIATE CONCE RNS WILL DEFINITELY ENHANCE THE TURNOVER AND THE PROFIT OF T HE GROUP CONCERNS. IT IS A FACT THAT IN GROUP CONCERNS SOME COMPANIES ARE ITA 638 TO 640/12 :- 5 -: CARRYING ON OPERATIONAL ACTIVITIES AND OTHER COMPAN IES ARE ACTING AS CATALYSTS TO BOOST THE PERFORMANCE OF THOSE OPER ATING COMPANIES. 2.5. VIEWED IN THE ABOVE PERSPECTIVE, WE CANNOT SA Y THAT THE ASSESSEE COMPANY HAS MADE INVESTMENTS IN SHARES OF SHRIRAM INVESTMENTS LIMITED AND SHRIRAM TRANSPORT F INANCE COMPANY LIMITED JUST FOR THE SIMPLE PURPOSE OF EARN ING TAX-FREE DIVIDEND INCOME. AS RIGHTLY POINTED BY THE ASSESS EE, WHEN THOSE INVESTMENTS IN SHARES ARE LIQUIDATED BY THE ASSESSE E COMPANY, IT IS ACCOUNTABLE FOR CAPITAL GAINS TAXATION. THEREFO RE, THERE IS NO CASE OF UNCONDITIONAL EXEMPTION FROM TAXATION AS FA R AS THE INVESTMENTS MADE BY THE ASSESSEE ARE CONCERNED. 2.6. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE INVESTMENTS BEING MADE AS A BUSINESS PROPOSITION AN D IN THE LIGHT OF THE DECISION OF THE TRIBUNAL RENDERED IN ASSESSE ES OWN CASE FOR THE EARLIER ASSESSMENT YEAR 2002-03, WE HOLD TH AT THE LOWER AUTHORITIES HAVE ERRED IN DISALLOWING ` 1,72,02,624/- AGAINST THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE UNDER THE HEAD INTEREST. THIS DISALLOWANCE IS ACCORDINGLY DELETED . 2.7. THE SECOND ISSUE RAISED IN THE APPEAL IS REGA RDING DISALLOWANCE OF ` 22,98,746/- BEING 2% OF THE DIVIDEND INCOME ITA 638 TO 640/12 :- 6 -: EARNED BY THE ASSESSEE. THE ASSESSING AUTHORITY HA S DISALLOWED AN AMOUNT OF ` 22,98,746/- AS EXPENDITURE ATTRIBUTABLE TO DIVIDEN D INCOME EARNED BY THE ASSESSEE. IT IS THE CASE OF T HE ASSESSEE THAT THE DISALLOWANCE MADE BY THE ASSESSING AUTHORI TY WORKS OUT TO ` 2 LAKHS PER DIVIDEND WARRANT RECEIVED BY THE ASSES SEE COMPANY. IT IS ALSO THE CASE OF THE ASSESSEE THAT THE DISALLOWANCE WORKS OUT TO 2% OF THE TOTAL DIVIDEND OF ` 11,49,37,339/- EARNED BY THE ASSESSEE. IT IS THE C ASE OF THE ASSESSEE THAT IT HAS NOT INCURRED ANY EXPENDITURE O N THIS INCOME, AS IT WAS RECEIVED BY CHEQUES AND NO OTHER WORK WAS NECESSARY FOR OBTAINING THE SAID INCOME. 2.8. WE CONSIDERED THIS ISSUE. WE ARE NOT ON THE QUESTION WHETHER THE INCOME WAS EARNED WITHOUT INCURRING A NY MECHANICAL EXPENDITURE LIKE CLEARANCE CHARGES, COLL ECTION CHARGES ETC. OR NOT. WE ARE CONCERNED ABOUT THE EXPENDITURE BY WAY OF REMUNERATION PAID TO TOP MANAGEMENT AND E XECUTIVES. THE TOP MANAGEMENT AND EXECUTIVES OF THE ASSES SEE COMPANY WOULD BE REQUIRED TO DECIDE ABOUT THE INVES TMENTS, WHETHER TO CONTINUE OR LIQUIDATE ETC. INVESTMENT I S A VERY IMPORTANT PART OF THE ASSETS OF THE ASSESSEE COMPAN Y. THEREFORE, EVEN THOUGH THERE IS NO DIRECT MECHANICAL EXPENDITU RE IN REALIZING ITA 638 TO 640/12 :- 7 -: THE DIVIDEND INCOME, DEFINITELY SOME MANAGEMENT EXP ENDITURE HAS TO BE ATTRIBUTED TOWARDS EARNING OF TAX-FREE DI VIDEND INCOME. 2.9. BUT IN THE PRESENT CASE, THE INVESTMENTS WE RE SO OLD AND THOSE INVESTMENTS HAVE BEEN HELD BY THE ASSESSE E COMPANY IN A CONSISTENT MANNER AND AS SUCH, THE SCOPE OF IN DIRECT EXPENDITURE ALSO WOULD BE LITTLE LESSOR. TAKING IN TO CONSIDERATION ALL THE ASPECTS OF THE CASE, WE MODIFY THE DISALLOW ANCE TO A LUMPSUM AMOUNT OF ` 10 LAKHS. THIS GROUND IS PARTLY ALLOWED. 2.10. THE THIRD ISSUE RAISED BY THE ASSESSEE IN T HE APPEAL IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF ` 71,164/- BEING INTEREST PAID ON BORROWINGS AS RELATING TO INTEREST FREE ADVANCES TO M/S. SHRIRAM CYBERTECH (P) LTD. IT IS THE CASE OF THE ASSESSEE THAT THE INTEREST OF ` 71,164/- ON OVERDRAFT DURING THE RELEVANT PREVIOUS YEAR WAS IN FACT FOR THE FUNDS UTILIZED FOR THE ASSESSEES OWN BUSINESS. THESE ARE ALL MATTERS REFLECTED IN THE BOOKS OF ACCOUNT O F THE ASSESSEE. WE FIND NO REASON TO REJECT THE EXPLANATION OFFERED BY THE ASSESSEE. ACCORDINGLY, THE DISALLOWANCE OF ` 71,164/- IS DELETED. 3. THUS, THIS APPEAL FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2005-06 IS PARTLY SUCCESSFUL. ITA 638 TO 640/12 :- 8 -: 4. NEXT, WE WILL CONSIDER THE APPEAL FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2007-08 IN ITA NO.639/MDS/2012. 4.1. THE FIRST GROUND RAISED BY THE ASSESSEE IS T HAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN HO LDING THAT THE PROVISIONS OF SEC.14A ARE APPLICABLE IN RESPECT OF INTEREST OF ` 1,28,21,918/- PAID TO STANDARD CHARTERED INVESTMENT S AND LOANS (INDIA) LTD. AND THE FACILITATION FEE OF ` 4,55,00,000/- PAID TO STANDARD CHARTERED BANK. 4.2. IT IS THE CASE OF THE ASSESSEE THAT THE BORRO WED AMOUNTS WERE UTILIZED FOR INVESTMENTS IN SHARES OF THE ASSESSEES SUBSIDIARY COMPANY AND THERE IS NO RECEIPT OF DIVID END FROM THE SUBSIDIARY COMPANY IN THE YEAR. IT IS THE CASE OF THE ASSESSEE COMPANY THAT THE COMMISSIONER OF INCOME-TAX(APPEALS ) HAS FAILED TO APPRECIATE THAT THE INVESTMENTS IN THESE SHARES HAVE BEEN MADE DURING THE COURSE OF ASSESSEES BUSINESS OF BUSINESS PROMOTION AND NOT AS INVESTMENTS TO EARN DIVIDEND I NCOME. THE ASSESSEE ARGUES THAT WHEN THE SHARES ARE SOLD, THE ASSESSEE WILL BE LIABLE FOR CAPITAL GAINS TAXATION AND, THEREFORE , THE EXPENDITURE INCURRED IN RESPECT OF BORROWINGS CANNOT BE CLASSIF IED PURE AND SIMPLE AS IN RELATION TO INCOME WHICH DOES NOT FOR M PART OF THE ITA 638 TO 640/12 :- 9 -: TOTAL INCOME UNDER THIS ACT, WHICH IS THE PRIME CO NDITION FOR APPLYING SEC.14A. THE ASSESSEE FURTHER ARGUES THAT AN EXPENDITURE MAY GIVE RISE TO A TAXABLE OR NON TAXAB LE INCOME IN A YEAR, AND UNLESS THERE IS NO EXEMPT INCOME, THE PRO VISIONS OF SEC.14A ARE NOT APPLICABLE IN RESPECT OF THAT EXPEN DITURE. 4.3. THE ASSESSEE ALSO ARGUES THAT THE RELIANCE PL ACED BY THE COMMISSIONER OF INCOME-TAX(APPEALS) ON THE SPEC IAL BENCH DECISION OF THE TRIBUNAL IN THE CASE OF CHEM INVEST LIMITED VS. ITO (121 ITD 318) HAS NOT CONSIDERED THE APPLICABIL ITY OF SEC.14A IN A SITUATION WHERE THE EXPENDITURE IS IN RESPECT OF AN ITEM WHICH CAN GIVE RISE TO BOTH EXEMPT AND NON EXEMPT INCOME. 4.4. THE VERY SAME ISSUE IS CONSIDERED AND DISCUSS ED BY US IN DETAIL WHILE DEALING WITH THE APPEAL FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2005-06 IN ITA NO.638/MDS/2012. IT IS TO BE SEEN THAT THE BUSINESS OF THE ASSESSEE IS INVEST MENT IN SHARES. IT IS IN THE COURSE OF CARRYING ON OF THE SAID BUSINESS THAT THE ASSESSEE HAS INVESTED IN SHARES IN ITS SUBSIDIA RY COMPANY. IT IS FOR THAT INVESTMENT THAT THE ASSESSEE HAS PAID I NTEREST TO STANDARD CHARTERED INVESTMENTS AND LOANS (INDIA) LT D. AND THE FACILITATION FEE PAID TO STANDARD CHARTERED BANK. THEREFORE, THE EXPENDITURE WAS INCURRED ESSENTIALLY FOR THE PURPOS E OF THE ITA 638 TO 640/12 :- 10 -: BUSINESS CARRIED ON BY THE ASSESSEE. IT IS IN THIS CONTEXT THAT THE PRINCIPLE COMMERCIAL EXPEDIENCY COMES INTO PLAY. THE ISSUE IS CONSIDERED IN ITA NO.638/MDS/2012, AS ALREADY POINT ED OUT. 4.5. THEREFORE, WE FIND THAT THERE IS NO JUSTIFICA TION IN APPLYING SEC.14A IN RESPECT OF INTEREST OF ` 1,28,21,918/- PAID TO STANDARD CHARTERED INVESTMENTS AND LOANS (INDIA) LT D. AND THE FACILITATION FEE PAID TO STANDARD CHARTERED BANK. ACCORDINGLY, THOSE ADDITIONS MADE BY THE ASSESSING OFFICER AND C ONFIRMED BY THE COMMISSIONER OF INCOME-TAX(APPEALS) ARE DELETED . 5. THE APPEAL FILED BY THE ASSESSEE FOR THE ASSESS MENT YEAR 2007-08 IS ALLOWED. 6. NEXT, WE WILL CONSIDER THE APPEAL FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2008-09 IN ITA NO.640/MDS/2012. 6.1 THE FIRST ISSUE IS REGARDING THE DISALLOWANCE OF ` 19,66,375/- BEING INTEREST PAYMENT ON LOANS UTILIZE D FOR ACQUIRING SHARES OF THE ASSESSES SUBSIDIARY, SHRIRAM INDUSTR IAL HOLDINGS LTD. THIS ISSUE STANDS CONSIDERED BY US FOR EARL IER ASSESSMENT YEARS AND IN THE LIGHT OF THOSE DECISIONS, WE FIND THAT THE ITA 638 TO 640/12 :- 11 -: DISALLOWANCE OF THE ABOVE AMOUNT IS NOT JUSTIFIED. IT IS ACCORDINGLY, DELETED. 6.2. THE NEXT ISSUE RAISED BY THE ASSESSEE IS REGA RDING THE DISALLOWANCE OF ` 50,000/-, WHICH RELATES TO GENERAL AND ADMINISTRATIVE EXPENSES PERTAINING TO DIVIDEND INCO ME AND INVESTMENTS IN THE PAST YEAR. FOR THE REASONS STAT ED IN OUR ORDER FOR THE ASSESSMENT YEAR 2005-06 IN ITA NO.638/MDS/2 012, WE UPHOLD THE ABOVE DISALLOWANCE AND IT IS CONFIRMED. 6.3. THE THIRD GROUND RAISED BY THE ASSESSEE IS TH AT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN CO NFIRMING THE ADDITION OF ` 20,16,375/- IN THE COMPUTATION OF INCOME UNDER SEC.115JB. THE ABOVE AMOUNT IS MADE UP OF ` 19,66,375/- BEING THE INTEREST AND ` 50,000/- BEING GENERAL AND ADMINISTRATIVE EXPENSES. THE DISALLOWANCE OF ` 19,66,375/- HAS ALREADY BEEN DELETED BY US. THEREFORE, THAT CANNOT BE ADDED WHI LE COMPUTING THE BOOK PROFIT UNDER SEC.115JB. THE AMOUNT OF ` 50,000/- IS ONLY A DISALLOWANCE FOR THE PURPOSE OF COMPUTING THE TAX ABLE INCOME OF THE ASSESSEE. THAT DISALLOWANCE CANNOT CHANGE T HE FRAME OF PROFIT AND LOSS ACCOUNT PREPARED BY THE ASSESSEE UN DER THE PROVISIONS OF THE COMPANIES ACT, 1956. THEREFORE, THE SAID ITA 638 TO 640/12 :- 12 -: AMOUNT OF ` 50,000/- ALSO CANNOT BE ADJUSTED WHILE COMPUTING T HE PROFIT AND LOSS ACCOUNT UNDER SEC.115JB. THEREFORE , THE ADDITION OF ` 20,66,375/- MADE BY THE ASSESSING OFFICER FOR THE PURPOSE OF BOOK PROFIT UNDER SEC.115JB IS DELETED. 7. THE APPEAL FOR THE ASSESSMENT YEAR 2008-09 IS P ARTLY ALLOWED. 8. IN RESULT, THE APPEALS FILED BY THE ASSESSEE FO R THE ASSESSMENT YEARS 2005-06 AND 2008-09 ARE PARTLY ALL OWED AND THE APPEAL FILED FOR THE ASSESSMENT YEAR 2007-08 IS ALLOWED. ORDER PRONOUNCED ON MONDAY, THE 4 TH OF FEBRUARY, 2013 AT CHENNAI. SD/- SD/- (S.S.GODARA) (DR.O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED THE 4 TH FEBRUARY, 2013 MPO* COPY TO : APPELLANT/RESPONDENT/CIT/CIT(A)/DR